Page 49 - An Introduction To Predictive Maintenance

Financial Implications and Cost Justification 39

value. Find the factor 1.521 at the intersection of three years and 15 percent. If our
example cost is $35,000, it is multiplied by the factor to give:

$35,000 ¥ 1.521 = $53,235 due at the end of the term

Present values from Table 2–2 are useful to determine how much we can afford to
pay now to recover, say, $44,000 in expense reductions over the next two years. If the
interest rates are expected to be lower than 15 percent, then:
$44,000 ¥ 0.75% = $33,264

Note that a dollar today is worth more than a dollar received in the future. The annuity
tables are for uniform streams of either payments or recovery. Table 2–3 is used to
determine the value of a uniform series of payments. If we start to save now for a
future project that will start in three years, and save $800 per month through reduc-
tion of one person, and the cost of money is 1 percent per month, then $34,462 should
be in your bank account at the end of 36 months.

$800 ¥ 43.077 = $34,462
The factor 43.077 came from 36 periods at 1 percent. The first month’s $800 earns
interest for 36 months. The second month’s savings earns for 35 months, and so on.
The use of factors is much easier than using single-payment tables and adding the
amount for $800 earning interest for 36 periods ($1,114.80), plus $800 for 35 periods
($1,134.07), and continuing for 34, 33, and so on, through one. If I sign a purchase
order for new equipment to be rented at $500 per month over five years at 1 percent
per month, then:
$500 ¥ 44.955 = $22,478

Note that five years is 60 months in the period column of Table 2–4. Capital recov-
ery Table 2–5 gives the factors for uniform payments, such as mortgages or loans that
repay both principal and interest. To repay $75,000 at 15 percent annual interest over
five years, the annual payments would be:
$75,000 ¥ 0.298 = $22,350

Note that over the five years, total payments will equal $111,750 (5 ¥ $22,350), which
includes the principal $75,000 plus interest of $36,750. Also note that a large differ-
ence is made by whether payments are due in advance or in arrears.

A maintenance service manager should understand enough about these factors to do
rough calculations and then get help from financial experts for fine-tuning. Even more
important than the techniques used is the confidence in the assumptions. Control and
finance personnel should be educated in your activities so they will know what items
are sensitive and how accurate (or best judgment) the inputs are, and will be able to
support your operations.