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    Sppa

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    Upasna Handa
    The document discusses the concept of economic life and how it differs from physical life. Economic life is defined as the replacement cycle that minimizes the total uniform annual equivalent cost, which includes operating/maintenance costs and capital costs. Capital costs represent the decline in asset value over time through depreciation. An illustration is provided of a company calculating the economic life of a machine by determining the uniform annual equivalent costs for various replacement periods and identifying the period that minimizes total costs.

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    Sppa

    Uploaded by

    Upasna Handa
    27 views9 pages
    The document discusses the concept of economic life and how it differs from physical life. Economic life is defined as the replacement cycle that minimizes the total uniform annual equivalent cost, which includes operating/maintenance costs and capital costs. Capital costs represent the decline in asset value over time through depreciation. An illustration is provided of a company calculating the economic life of a machine by determining the uniform annual equivalent costs for various replacement periods and identifying the period that minimizes total costs.

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    liye cycle determination

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    The document discusses the concept of economic life and how it differs from physical life. Economic life is defined as the replacement cycle that minimizes the total uniform annual equivalent cost, which includes operating/maintenance costs and capital costs. Capital costs represent the decline in asset value over time through depreciation. An illustration is provided of a company calculating the economic life of a machine by determining the uniform annual equivalent costs for various replacement periods and identifying the period that minimizes total costs.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    27 views9 pages

    Sppa

    Uploaded by

    Upasna Handa
    The document discusses the concept of economic life and how it differs from physical life. Economic life is defined as the replacement cycle that minimizes the total uniform annual equivalent cost, which includes operating/maintenance costs and capital costs. Capital costs represent the decline in asset value over time through depreciation. An illustration is provided of a company calculating the economic life of a machine by determining the uniform annual equivalent costs for various replacement periods and identifying the period that minimizes total costs.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    of 9

    Economic Life

    It is the period after which the asset should be replaced to


    minimize the sum of operating & maintenance costs and
    capital costs expressed on an annual basis.
    OR
    It is the replacement cycle that minimizes the uniform
    annual equivalent total cost UAE(TC) of operating and
    owning the asset i.e.
    UAE(TC)= UAE(OM) + UAE(CC)
    UAE is a function of present value of cost, life of the asset
    and discount rate.

    Operating & Maintenance Costs:


    It covers labor, material and power expenses to operate,
    maintain and repair the asset.

    Capital Costs:
    It represents the decline in value of asset over time- this
    decline occurs as the asset is used up for producing goods
    and also as it ages with the passage of time.

    Difference between Physical and Economic


    Life:
    Physical life of an asset represents the no. of years it can be
    used to produce a certain output by regular maintenance and
    repair while the economic life of an asset refers to the no. of
    years the asset should be used to produce a certain output.

    Illustration

    Modern Plastics Limited is considering a machine to


    produce plastic products. It requires an outlay of Rs 0.6
    million and will be depreciated at a rate of 33.33% per
    annum as per the written down value method for income
    tax purposes. The expected operating & maintenance costs
    and salvage value for the next eight years which represents
    the maximum physical life of the machine are shown below.
    The cost of capital appropriate for the machine is 12% and
    the tax rate for Modern Plastics Limited is 40%. The firm
    needs to determine the economic life of the machine.

    Calculation of UAE(OM) for Various


    Replacement Periods

    Calculations of Capital Costs UAE(CC)

    To derive UAE(CC) for various replacement periods, the


    following components must be taken into account: the initial
    outlay (IO), depreciation tax shields (DTS) and the net salvage
    value (SV).
    UAE(CC)= UAE(IO) [UAE(DTS) + UAE(SV)]

    Calculation of UAE (IO) for Various


    Replacement Periods

    Calculation of UAE (DTS) for Various


    Replacement Periods

    Calculation of UAE (SV) for Various Replacement Periods

    Summary of Information Required to


    Determine the Economic Life

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