The concept of economic life is central to asset management. It refers to the period when a company expects to use an asset before the costs of maintenance and repairs outweigh the replacement cost. In other words, economic life is when it becomes financially wise to replace equipment rather than continue to maintain it.
For maintenance and asset managers, understanding and accurately tracking the economic life of assets is essential for cost-effective operations.
This article explores the concept of economic life, the factors that impact it, and how a Computerized Maintenance Management System (CMMS) can assist in tracking and optimizing this aspect of asset management.
What is Economic Life?
Economic life is an asset management concept that goes beyond a piece of equipment’s physical or expected lifespan. While an asset may continue to function well beyond its economic life, maintenance and repair costs often increase over time. Economic life is reached when these maintenance costs become higher than what it would cost to replace the asset with a new one.
For example, an industrial machine may have a physical lifespan of 15 years, but its economic life may only be 10 years. After the 10-year mark, maintenance and repairs may increase to a point where replacing the machine is more cost-effective.
In contrast, the useful life refers to the estimated period during which an asset, such as machinery or equipment, is expected to perform its intended function efficiently and remain operational.
Critical Factors Affecting Economic Life
1. Asset Type
Different types of equipment have varying economic lives due to wear rates, technological obsolescence, and operational conditions.2. Usage Intensity
Equipment that is heavily used tends to reach its economic life sooner due to accelerated wear and tear.3. Maintenance History
Well-maintained equipment can often have an extended economic life. However, excessive maintenance costs can also signal the end of its cost-effectiveness.4. Technological Advancements
Newer technology can render equipment obsolete sooner than expected, especially if newer models offer substantial improvements in efficiency or cost savings.5. Replacement Costs
If replacement costs are high, extending an asset’s economic life may be more advantageous, even with increased maintenance costs.6. Availability of Replacements
Delays and order backlogs may delay an assets replacement well beyond its economic life.Understanding these factors allows maintenance managers and business leaders to decide whether to repair, refurbish, or replace equipment. A CMMS greatly aids this decision-making process.
Role of a CMMS in Managing Economic Life
A Computerized Maintenance Management System (CMMS) plays a crucial role in tracking, managing, and extending an asset’s economic life. It helps maintenance teams capture detailed data on asset performance, maintenance costs, and usage patterns, making assessing when an asset reaches its economic life easier.
1. Tracking Maintenance Costs Over Time
A CMMS keeps a complete maintenance history for each asset, including repair costs, parts used, labor, and frequency of service. By reviewing this data, managers can identify trends in increasing maintenance costs, helping them assess when costs are approaching the economic threshold where replacement would be more economical.2. Usage and Condition Monitoring
Usage patterns are directly related to an asset’s economic life, and a CMMS can track these patterns, including runtime hours, cycles, and mileage. Some CMMS systems integrate with sensors and IoT devices, capturing real-time usage and condition data. Monitoring asset usage allows managers to make more accurate projections of economic life based on actual operating conditions rather than theoretical estimates.3. Asset Lifecycle Management Reports
A CMMS generates detailed reports on asset performance, cost, and economic life, helping managers make data-driven decisions. These reports provide insights into when each asset is expected to reach its economic life, assisting managers in budgeting for replacements in advance and avoiding unexpected expenses.4. Budgeting and Planning
Accurate tracking of economic life through a CMMS allows maintenance teams to plan for asset replacements in alignment with the company’s financial planning. This tracking ensures a smoother transition for asset replacement and reduces the risk of unexpected downtime due to equipment reaching the end of its economic life without preparation.Practical Example of Economic Life Cycle
Consider a Boeing 737-800 purchased new in 2005 for $70 million. Over 20 years:
- Years 1–10: The aircraft operates intensively, performing five short-haul flights daily, generating high revenue with moderate fuel efficiency and lower maintenance costs.
- Years 11–15: Maintenance costs rise, necessitating more frequent maintenance checks. Fuel efficiency is lower compared to newer aircraft, reducing profitability.
- Years 16–20: The airline considers either selling or retiring the aircraft due to high operating costs. It might be sold to a budget airline that can operate it at a lower cost structure, thus extending its service life in a new market.
Gain Greater Visibility on Economic Life
For maintenance managers and operations leaders, understanding and managing equipment’s economic life is essential to controlling costs and optimizing asset performance. Economic life is not just about how long equipment can physically last but rather the point at which it becomes more financially sensible to replace it than to continue maintaining it.
A CMMS is invaluable in this process, offering insights through data on maintenance costs, usage patterns, and condition monitoring. With the help of a CMMS, leaders can make informed decisions about asset replacement, allocate resources effectively, and extend their economic life where possible.
By using a CMMS like Zoidii to track economic life, organizations can better manage their assets, maximize equipment uptime, and improve cost-efficiency in the long term.
Bonus Resources
If you’re unsure whether to replace certain assets or keep repairing them, our Repair Versus Replace Equipment article will provide poignant tips on deciding.
