Erdos Had The Number First

So, I’ve been thinking about hardware costing, since I have to look at it in my day-to-day work. I think a more formal method for calculating the cost of electronic hardware should be created. I’ve been toying with one now that’s basically
an attempt to find the total cost of a given piece of hardware.

For example, a workstation that retails at $1,200. What does that workstation really cost? One method I’ve been using
is:

taking the Future value of the money, based on what the companies expected rate of return for capital is, plus the finance costs less the depreciation benefits (using three year straight line) plus the service cost should yield the actuall cost of the hardware.

So, that $1,200 workstation, financed for three years at 4%, going into an organization with 6 support staff (with a total support rate of 600,000 USD per year) adding a support cost of 10 hours per year. The depreciation of this is 400 dollars per year, with a salvage value of $0. This adds a tax benefit of $160 per year (or 480 over three years). The assumtion is that the expected rate of return for this company is 12% (which means that the company expects to generate .12 for every dollar invested). This brings the cost of this workstation to 1,836.52 in constant dollars for three years. This is then 612.17 dollars per year, or 11.77 dollars per week. This would be a good idea to buy this hardware if it would create more than 12 dollars of increased productivity per week, or more than 612.17 dollars of productivity per year. That may not seem like much and it’s really only 12.73 hours per year (of cost for one person whose rate is 100,000 per year). That’s a little more than one day, but it probably pales in comparison to how much illness costs in terms of productivity.

BUT the question is will this new workstation actually be able to generate a net increase in productivity? we can not
answer this question with the above information. In fact, there are times when new hardware will actually reduce
productivity, but we’re not going to get into that right now. The last thing I’m going to say is this, just because you increase a given employee’s productivity does not mean you will yield any real short term benefit from that. You will only realise a benefit if the increase either 1) increases income or 2) decreases costs. An example of this would be a more efficient delivery person: they’re rate and your profitability are unchanged even if they deliever packages on their route 15% more efficiently.