A participant ask about the cost per year of an asset. He gave a simple example of a pump that costs $10,000 that should last ten years. So if you divide that by over the course of ten years and then by month, figures that to be $83 a month. If you set aside the depreciation for the asset.
So the reason for the question is if someone else was looking at interest only and figured at 6 percent. And he’s asking if he’s missed something or if when you’re looking at the cost per year of an asset, what should you take into consideration?
And I’m not sure if he’s talking about the $10,000 just being the purchase price or that’s the purchase price and the operation and maintenance cost.
My first thought is we need to be thinking about both, you know the initial cost to purchase the piece of equipment and then the annual cost to operate and maintain that equipment.
So it sounds a little bit like we’re just talking about the purchase price and then I’m wondering if it’s a matter of trying to put the money aside to be able to purchase the new piece of equipment later or just the financial transaction of doing depreciation.
Because there are two different things kind of. So sometimes we use the concept of depreciation when we’re looking at rates and rate structures and that kind of thing but we’re not actually setting the money aside. And sometimes we’re trying to set the money aside for later to be able to purchase that equipment. So kind of two different things…
He clarified that he want it to be for replacement cost.
Okay so for replacement cost.
So in those cases, we’re looking at, I mean I think he’s on the right track to say, we need to put money aside in let’s say a reserve account, it’s a logical place to put that money. And looking at okay, if it will cost me $10,000 you know, 10 years from now, I’m going to need $1,000 a year.
He’s correct in saying that there will be some inflation in that price. It’s unlikely to be exactly $10,000 today and $10,000 ten years from now. However, it’s a little bit unclear exactly how much increase there will be in the cost because technologies change.
I think that’s a really good point because even with just a very simple pump, ten years later, you’ve got a disposal cost in there as well of your existing pump. But you might find that your amounts have changed.
And certainly, your control technologies will change in that period. And so it’s just, you need to think I’d be disposing and what do I need to do to actually get the old pump out and put the new pump in.
But also, quite often it’s not a like for like replacement. So you’re thinking has changed or you’ve got some more demand or whatever it is. And that’s not just replacement, then you ask additional capital, but they’re not as simple as you initially think – those sorts of things.
So if you are putting money aside, it’s just also thinking about the end of life handover as well.
In terms of the cost equation there and whether you then take that opportunity to update your electrical and control systems.
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