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Replacement Analysis
Reduced Performance:
Wear and tear;
Decreasing reliability and productivity;
Increasing operating and maintenance costs.
Altered Requirements:
New production needs, accuracy, speed, etc.
Obsolescence:
Current assets may be less productive;
Not state of the art meet competition.
11.1 Terminology
Defender Asset:
Currently installed asset;
Challenger Asset:
The potential replacement or challenging asset;
Under consideration to replace the defender asset.
The current fair market value of the defender at the time the
replacement decision is being examined.
Compute:
AW(i%)t =
-Capital Recovery
- AW of operating costs
Salvage values may be incorporated into the capital
recovery term.
Do this for n = 1, then n = 2, then n = and observe
the min. cost n value.
Notation:
P = initial investment in the asset;
Sk = estimated salvage value after k years;
AOCj = annual operating costs for year j (j = 1 to k)
k the number of years for the analysis.
AOC j ( P / F , i, j ) ( A / P, i, k )
j=1
11.2 Example
Defender Asset;
3 years old now;
Market value now $13,000;
5-year study period assumed;
Requires estimates of the future salvage values
and annual operating costs for the 5-year
period.
11.2 Example
$9,000 $-2,500
t = 2:
$8,000 -2,700
t = 3:
$6,000 -3,000
t = 4:
$2,000 -3,500
t = 5:
$0
-4,500
Period-by-period analysis
AW(10%)1 = (-$13,000)(A/P,10%,1) +
$9,000(A/F,10%,1) 2,500= -$7,800
AW(10%)2 = (-13,000)(A/P,10%,2) +
8,000(A/F,10%,2) -[2,500(P/F,10%,1) +
2,700(P/F,10%,2)](A/P,10%,2) = -$6,276/yr
AW(10%)3 = (-13,000)(A/P,10%,3) +6,000(A/F,10%,3)
-[2500(P/F,10%,1) + 2,700(P/F,10%,2) +
3,000(P/F,10%,3](A/P,10%,3) = -$6,132/yr
Total AWk
k=1:
-7,800
k=2:
-6,276
k=3:
-6,132
k=4:
-6,556
k=5:
-6,579
Example-Defender Analysis
Input Parameters
Interrest Rate (%)
Investment Cost ($)
No of Years to Study
(1)
Mkt. Value
$12,000.00
$9,600.00
$7,680.00
Year
1
2
3
(3)
Cap. Rec. Costs
-$4,500
-$4,071
-$3,711
10.00%
15,000.00
3
(4)
AW of AOC's
-$20,000
-$14,286
-$13,595
Year
1
2
3
(2)
AOC/Yr
-$20,000.00
-$8,000.00
-$12,000.00
(5)
Total AW(i%)
-$24,500
-$18,357
-$17,307
Min Life
ID
Min Life
(3)
Cap. Rec. Costs
-$15,000
-$13,571
-$12,372
-$11,361
-$10,506
$
(1)
Mkt. Value
$40,000.00
$32,000.00
$25,600.00
$20,480.00
$16,384.00
(4)
AW of AOC's
-$5,000
-$5,952
-$6,873
-$7,762
-$8,620
10.00%
50,000.00
5
AWC = -19,123/year
(2)
AOC/Yr
-$5,000.00
-$7,000.00
-$9,000.00
-$11,000.00
-$13,000.00
Year
1
2
3
4
5
(5)
Total AW(i%)
-$20,000
-$19,524
-$19,245
-$19,123
-$19,126
Min. Cost
Life
N = 4 Years
AWD = -$17,307/year;
nD = 3 years;
AWC = -$19,123/year;
nC = 4 years;
Conclusion:
Stay with the Defender for at least one more
year lowest AW(10%) cost: -$17,307/yr vs. $19,123/yr.