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The True Cost of Mileage!

Problem Statement:

Ravi, bought a brand new Swift to drive on the Uber platform. After a year, Ravi has driven 100,000 kms and made Rs 3,00,000 after deducting for fuel and maintenance. How much Ravi can make in 5 years from his new car? Options:
10 lakhs 15 lakhs
20 lakhs
25 lakhs
Answer: 10 lakhs

Solution:

Assets like cars gradually depreciate in both value and performance with heavy usage, impacting long-term profitability for drivers. In Ravi's case, while he earned Rs 3,00,000 in his first year, a substantial amount of this will be offset in future years as the car experiences increased wear and tear. Typically, as a car nears the 1.5 to 2 lakh km mark, maintenance and service expenses grow sharply. This is especially true for components like tires, suspension, and transmission, which have high replacement costs. Consequently, the profit Ravi could initially generate will diminish due to these recurring maintenance needs, making the net earnings less sustainable over time. Beyond a certain point, operating the vehicle becomes financially unviable, and it’s often more practical to either replace the vehicle or undertake a major overhaul, each of which comes at a cost. Considering these variables, Rs 10 lakh is the most realistic estimate for his five-year earnings, as any projection beyond this would likely ignore the escalating costs of upkeep and the diminishing returns due to depreciation.

Lookalike Businesses with Shelf Life Constraints:

Groceries: Vegetables and perishables have a limited shelf life, requiring strict timelines to ensure freshness and avoid spoilage.


Restaurants: Prepared food has a short shelf life, with rapid depreciation in quality, which impacts profitability if not managed quickly.


Airlines: Airplanes have a set lifespan, after which they require intensive maintenance or replacement to remain in operation.


Mobile Phones: Hardware limitations eventually limit compatibility with new software, reducing device usefulness and resale value over time.


Electronics and Appliances: Most electronics, like laptops or TVs, degrade in performance, often rendering them obsolete within a few years.

Takeaway

Factoring in asset shelf life is crucial for projecting realistic profits, growth, or revenue. Physical assets, whether vehicles, appliances, or technology, follow a predictable depreciation curve, with maintenance costs increasing as they near the end of their usable life. This is especially relevant in industries where profit margins are tied to sustained use, such as ride-hailing, logistics, and manufacturing. For example, a vehicle’s lifespan in fleet management dictates not only operational costs but also replacement schedules and financial planning. A clear understanding of these life-cycle patterns helps businesses and individuals avoid overestimating returns, ensuring that growth projections are not overly optimistic. In industries like ride-hailing or delivery services, balancing the initial cost against maintenance over time is key. Consideration of depreciation also allows companies to anticipate renewal cycles and plan for asset replacement at the right times, minimizing both operational downtime and financial strain.

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