Fundamentals of Business

Factors to be considered in buying capital equipment

Factors to be considered in buying capital equipment besides modes
of purchase, finance and return on investments, other factors include:
. Purpose
what is the main purpose of equipment?
. Versatility
is the equipment versatile?
. Standardisation
Is it compatible with equipment already installed, hence, variety reduction of spares
. Operations costs
Cost of fuel, power, labour.
. Installation costs
is the cost of installation, training included?
. Maintenance costs
Can equipment be maintained by the enterprise's staff or will special agreements with the vendor be necessary.
. Durability
is the equipment robust for its intended use.
. Life
how long will the equipment last before it needs upgrade or replacement?
. Reliability
breakdown equals backlogs, equals extended deliveries, is it reliable?
. Miscellaneous
Space consideration, how big, how heavy, any specific needs, example, ventilation e.t.c.

Life cycle cost Sum of all recurring and one time (non-recurring) costs over the full life span or a specified period of a good, service, structure, or system. In includes purchase price, installation cost, operating costs, maintenance and upgrade costs, and remaining (residual or salvage) value at the end of ownership or its useful life.

Life cycle cost analysis calculates the cost of a system or product over its entire life span. This also involves the process of Product Life Cycle Management so that the life cycle profits are maximised.

The analysis of a typical system could include costs for:
. Planning,
. Research and Development,
. Production,
. Operation,
. Maintenance,
. Cost of replacement,
. Disposal or salvage.

This cost analysis depends on values calculated from other reliability analyses like failure rate, cost of spares, repair times, and component costs. A life cycle cost analysis is important for cost accounting purposes. In deciding to produce or purchase a product or service, a timetable of life cycle costs helps show what costs need to be allocated to a product so that an organisation can recover its costs. If all costs can not be recovered, it would not be wise to produce the product or service.

It reinforces the importance of locked in costs, such as R&D.

It offers three important benefits:
. All costs associated with a project/product become visible, especially: upstream, R&D; downstream, customer service.
Example: products liable to technological change.
. It allows an analysis of business function interrelationships. Low R&D costs may lead to high customer service costs in the future.
. Differences in early stage expenditure are highlighted, enabling managers to develop accurate revenue predictions.