Matakuliah
Tahun
: D0762 – Ekonomi Teknik
: 2009
Replacement Analysis
Course Outline 10
Replacement Analysis
• When should a new truck replace the
existing truck?
• When should a process be redesigned?
• When should a product be redesigned?
The most common question asked in industry is: when should
the existing be replaced?
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
2
Replacement Analysis Terms
• Defender: the existing equipment, building, or decision
previously implemented
• Challenger: the proposed replacement currently under
consideration
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
3
Aspects of Replacement Analysis
1. Using available data to determine the analysis
technique
2. Determining the base comparison between
alternatives
3. Using analysis techniques when:
1.Defender marginal cost can be computed and
is increasing
2.Defender marginal cost can be computed and
is not increasing
3.Defender marginal cost is not available
4. Considering possible future challengers
4
5. After-tax analysis
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
The Replacement Problem
• Engineers replace the existing due to:
– Obsolescence: technological change
– Depletion: loss of market value
– Deterioration: wear that is overly expensive to repair
Shall the defender be replaced now or be maintained for
one or more periods?
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
5
Issues (Consider Before Starting)
– If a unit fails, must it be removed permanently from
service, or repaired?
– Are standby units available if the system fails?
– Do components or units fail independently of the
failure of other components?
– Is there a budget constraint?
– If the unit can be repaired after failure, is there a
constraint on the capacity of the repair facility?
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
6
Issues (Continued)
– Is only one replacement allowed over the planning
horizon? Are subsequent replacements allowed at
any time during the study period?
– Is there more than one replacement unit (price and
quality combination) available at a given point in
time?
– Do future replacement units differ over time? Are
technological improvements considered?
– Is preventative maintenance included in the model?
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
7
Issues (Continued)
– Are periodic operating and maintenance costs
constant or variable over time?
– Is the planning horizon finite or infinite?
– Are consequences other than economic effects
considered? (i.e., sociotechnical issues)
– Are income tax consequences considered?
– Is “inflation” considered?
– Does replacement occur simultaneously with
retirement, or are there non-zero lead times?
– Are cash flow estimates deterministic or stochastic?
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
8
Replacement Analysis Decision Chart
Where
Compare
Defender Marginal Defender Marginal
Defender
Best
1
Available
Increasing
Next-year
EUAC at
Cost Life
2
Available
Not increasing
EUAC at
Life
EUAC at
Cost Life
3
Not available
EUAC over
Useful Life
EUAC at
Cost Life
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
9
What Is the Basic Comparison?
• Identify the defender and the best challenger
– Product
– Machine
– Process
– Personnel
– Mix
Decision Criteria leads to one of the following:
If the defender is more economical, it should be retained.
If the challenger is more economical, it should be installed.
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
10
Example
12-1
Minimum Cost Life
of the Challenger
•EUAC Equivalent Uniform
Annual Cost
Year
EUAC of
Capital
Recovery
Costs
EUAC of
Maintenance
and Repair
Costs
EUAC of
Operating
Costs
Initial year
-7500
0
-500
-900
-400
$0.00
$432.69
$853.87
$1,263.56
$1,661.82
$2,048.71
$2,424.30
$2,788.67
$3,141.93
$3,484.18
$3,815.55
$4,136.17
$4,446.19
$4,745.75
$5,035.01
$500.00
$692.31
$879.50
$1,061.58
$1,238.59
$1,410.54
$1,577.47
$1,739.41
$1,896.41
$2,048.53
$2,195.80
$2,338.30
$2,476.08
$2,609.22
$2,737.78
Arithmetic
gradient
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
EUAC Total
Interest
rate
8%
$8,100.00
$4,205.77
$2,910.25
$2,264.41
$1,878.42
$1,622.37
$1,440.54
$1,305.11
$1,200.60
$1,117.72
$1,050.57
$995.21
$948.91
$909.73
$876.22
$8,600.00
$5,330.77
$4,643.62
$4,589.55
$4,778.84
$5,081.62
$5,442.31
$5,833.19
$6,238.94
$6,650.43
$7,061.93
$7,469.68
$7,871.18
$8,264.69
$8,649.02
<-----MIN
EUAC is the number of years
at which asset cost in
minimized.
Cost
EUAC plot
$10,000.00
$9,000.00
$8,000.00
$7,000.00
$6,000.00
$5,000.00
$4,000.00
$3,000.00
$2,000.00
$1,000.00
$0.00
Capital Recovery
Maintenance and
Repair
Operating
Total
0
5
10
15
20
Year
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
11
Marginal Costs
Example 12-2
Year
0
1
2
3
4
5
6
7
Incremental
cost
thereafter
$
-
Expense
Cost
Years
Investment Cost
Annual O&M
Cost
Annual Insurance
Cost
Useful Life
(years)
MARR
$25,000.00
0
$ 2,000.00
1
$
$ 5,000.00
3
$ 1,500.00
Foregone
Interest
O&M Cost
$3,750.00
$2,700.00
$1,950.00
$1,350.00
$ 900.00
$ 600.00
$ 450.00
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
25,000.00
18,000.00
13,000.00
9,000.00
6,000.00
4,000.00
3,000.00
2,500.00
500.00
7
15%
Loss in
Market
Value
Market Value
$
$
$
$
$
$
$
7,000.00
5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
500.00
Marginal Costs are the year-byyear costs for keeping an asset.
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
5,000.00
This example illustrates the
calculation of the marginal costs
for a new item.
Insurance
Cost
Total
Marginal
Cost
$ 5,000.00
$ 5,000.00
$ 5,000.00
$ 6,500.00
$ 8,000.00
$ 9,500.00
$11,000.00
$17,750.00
$15,200.00
$13,950.00
$14,350.00
$14,900.00
$15,600.00
$16,950.00
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
12
Marginal Cost Data Defender
Example 12-3
Year
0
1
2
3
4
5
6
7
Expense
Cost
Years
Investment Cost
Annual O&M
Cost
Annual Insurance
Cost
Useful Life
(years)
MARR
$15,000.00
0
Incremental
cost
thereafter
$
-
$10,000.00
1
$ 1,500.00
$
15,000.00
14,000.00
13,000.00
12,000.00
11,000.00
10,000.00
$
-
Here the marginal costs are
increasing.
5
15%
Loss in
Market
Value
Market Value
$
$
$
$
$
$
-
Is the marginal cost of defender
increasing?
$
$
$
$
$
1,000.00
1,000.00
1,000.00
1,000.00
1,000.00
Foregone
Interest
O&M Cost
Insurance
Cost
$2,250.00
$2,100.00
$1,950.00
$1,800.00
$1,650.00
$10,000.00
$11,500.00
$13,000.00
$14,500.00
$16,000.00
$
$
$
$
$
-
Total
Marginal
Cost
$13,250.00
$14,600.00
$15,950.00
$17,300.00
$18,650.00
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
13
Replacement Analysis Technique #1
Defender marginal costs are increasing
Challenger
•
$
25,000.00
0
Incremental cost
thereafter
$
-
$
2,000.00
1
$
500.00
$
5,000.00
3
$
1,500.00
Expense
Replace when the
marginal cost of
ownership of the
defender is more
than the EUAC of
the challenger.
Investment Cost
Annual O&M
Cost
Annual Insurance
Cost
Useful Life
(years)
MARR
Year
0
1
2
3
4
5
6
7
Market Value
$
$
$
$
$
$
$
$
25,000.00
18,000.00
13,000.00
9,000.00
6,000.00
4,000.00
3,000.00
2,500.00
Cost
Years
Example 12-4
7
15%
Loss in Market
Value
$
$
$
$
$
$
$
7,000.00
5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
500.00
Foregone
Interest
$
$
$
$
$
$
$
3,750.00
2,700.00
1,950.00
1,350.00
900.00
600.00
450.00
O&M Cost
$
$
$
$
$
$
$
Insurance Cost
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
5,000.00
$
$
$
$
$
$
$
5,000.00
5,000.00
5,000.00
6,500.00
8,000.00
9,500.00
11,000.00
Total Marginal
Cost
$
$
$
$
$
$
$
17,750.00
15,200.00
13,950.00
14,350.00
14,900.00
15,600.00
16,950.00
EUAC through
year
$17,750.00
$16,563.95
$15,811.20
$15,518.57
$15,426.83
$15,446.61
$15,582.46
Min EUAC
<----MIN
Defender
$
15,000.00
0
Incremental cost
thereafter
$
-
$
10,000.00
1
$
1,500.00
$
-
Expense
Investment Cost
Annual O&M
Cost
Annual Insurance
Cost
Useful Life
(years)
MARR
Year
0
1
2
3
4
5
6
7
Market Value
$
$
$
$
$
$
15,000.00
14,000.00
13,000.00
12,000.00
11,000.00
10,000.00
Cost
$
Years
5
15%
Loss in Market
Value
$
$
$
$
$
1,000.00
1,000.00
1,000.00
1,000.00
1,000.00
Foregone
Interest
$
$
$
$
$
2,250.00
2,100.00
1,950.00
1,800.00
1,650.00
O&M Cost
$
$
$
$
$
10,000.00
11,500.00
13,000.00
14,500.00
16,000.00
Insurance Cost
$
$
$
$
$
-
Total Marginal
Cost
$
$
$
$
$
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
13,250.00
14,600.00
15,950.00
17,300.00
18,650.00
Challenger
Minimum EUAC
Results
$15,426.83
$15,426.83
$15,426.83
$15,426.83
$15,426.83
$15,426.83
$15,426.83
Replace
Replace
Replace
14
Analysis Technique # 1
• Appropriate when replacement repeatability
assumptions hold
• The best challenger will be available in all
subsequent years at the same economic cost
• The period of needed service is infinite
These assumptions appear to be
rather restrictive.
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
15
Relaxing the Restrictions
•
This spreadsheet considers that:
– The best challenger is available in subsequent years at the same
economic cost
– The project life is known and limited
Based on Example 12-4
Interest rate
Project life
15%
4
Keep Defender - Years
>>>>>>>>
>>>>>>>>
Years
0
1
2
3
4
5
6
7
8
9
10
0
0
$13,250.00
$13,877.91
$14,474.62
$15,040.45
$15,575.80
1
$17,750.00
$15,343.02
$14,992.98
$15,130.57
$15,442.32
$15,824.17
2
$16,563.95
$15,301.84
$15,034.44
$15,140.86
$15,414.63
$15,767.77
3
$15,811.20
$15,031.11
$14,873.60
$15,004.82
$15,282.29
$15,635.35
Install and keep Challenger - Years
4
5
6
$15,518.57 $15,426.83 $15,446.61
$14,930.09 $14,926.65 $14,971.85
$14,813.79 $14,821.58 $14,865.67
$14,945.65 $14,942.33 $14,971.19
$15,214.37 $15,195.64 $15,207.03
$15,558.78 $15,526.33 $15,522.24
7
$15,582.46
$15,004.99
$14,899.10
$14,993.63
$15,216.06
$15,518.95
8
9
10
$15,030.12
$14,925.09
$15,011.42
$15,223.32
$15,516.27
$15,049.66
$14,945.70
$15,025.75
$15,229.25
$15,514.06
$15,065.15
$14,962.29
$15,037.42
$15,234.13
$15,512.23
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
16
Minimum Cost Life of the Defender
Example 12-7
Data
Depends on when in
the life of the
defender the
analysis is
computed.
Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Partial life
10%
Salvage Value
at end of Year
n
$ 5,000.00
$ 4,000.00
$ 3,500.00
$ 3,000.00
$ 2,500.00
$ 2,000.00
$ 2,000.00
$ 2,000.00
$ 2,000.00
$ 2,000.00
$ 2,000.00
$ 2,000.00
$ 2,000.00
$ 2,000.00
$ 2,000.00
$ 2,000.00
Estimated
maintenance
costs for year
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
100.00
200.00
300.00
400.00
500.00
600.00
700.00
800.00
900.00
1,000.00
1,100.00
1,200.00
1,300.00
1,400.00
EUAC of
Capital
Recovery
EUAC of
Maintenance
EUAC Total
$1,500.00
$1,214.29
$1,104.23
$1,038.68
$991.39
$888.82
$816.22
$762.33
$720.92
$688.24
$661.89
$640.29
$622.34
$607.24
$594.42
$0.00
$47.62
$93.66
$138.12
$181.01
$222.36
$262.16
$300.45
$337.24
$372.55
$406.41
$438.84
$469.88
$499.55
$527.89
$1,500.00
$1,261.90
$1,197.89
$1,176.79
$1,172.41
$1,111.18
$1,078.38
$1,062.78
$1,058.16
$1,060.78
$1,068.29
$1,079.13
$1,092.21
$1,106.79
$1,122.31
Starting age
2
Ending age
15
Minimum
EUAC
EUAC of
Invested
Capital
EUAC of
Maintenance
EUAC
Total
Minimum
EUAC
<-----MIN
$850.00
$826.19
$803.17
$673.21
$595.70
$544.41
$508.11
$481.17
$460.46
$444.12
$430.94
$420.14
$411.17
$200.00
$247.62
$293.66
$338.12
$381.01
$422.36
$462.16
$500.45
$537.24
$572.55
$606.41
$638.84
$669.88
1,050.00
1,073.81
1,096.83
1,011.32
976.71
966.77 <-----MIN
970.27
981.61
997.70
1,016.66
1,037.35
1,058.99
1,081.05
Marginal
cost
$
$
$
$
$
$
$
$
$
$
$
$
$
Minimum
marginal
cost
250.00 <-----MIN
350.00
450.00
500.00
600.00
700.00
800.00
900.00
1,000.00
1,100.00
1,200.00
1,300.00
1,400.00
EUAC plot
1600
1400
1200
Cost
•
Full life
Interest rate
1000
EUAC Total
EUAC Total
800
600
400
200
0
0
5
10
15
20
Year
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
17
Replacement Analysis Technique #2
– If the replacement repeatability assumption holds, compare EUAC
of the defender asset at its minimum cost life against the EUAC of
the challenger at its minimum cost life.
Example 12-8 The repeatability assumptions do not hold.
Interest rate
Project life
15%
4
>>>>>>>>
Keep Defender - Years
Do not
install
challenger
Years
0
1
2
3
4
5
6
7
8
9
10
0
0
$6,120.00
$4,043.08
$3,660.17
$3,691.20
$3,880.20
1
$8,600.00
$7,273.49
$5,355.37
$4,649.44
$4,419.25
$4,419.38
2
$5,330.77
$5,631.35
$4,597.52
$4,192.89
$4,093.89
$4,162.01
3
$4,643.62
$5,093.29
$4,352.37
$4,050.29
$3,990.05
$4,073.32
Install and keep Challenger - Years
4
5
6
$4,589.55
$4,778.84
$5,081.62
$4,986.56
$4,941.21
$4,909.43
$4,354.80
$4,376.01
$4,391.57
$4,079.51
$4,116.67
$4,144.84
$4,017.99
$4,052.04
$4,078.52
$4,091.22
$4,115.76
$4,135.22
7
$5,442.31
$4,886.13
$4,403.37
$4,166.74
$4,099.50
$4,150.88
8
9
10
$4,868.46
$4,412.54
$4,184.11
$4,116.40
$4,163.65
$4,854.72
$4,419.81
$4,198.09
$4,130.17
$4,174.17
$4,843.83
$4,425.66
$4,209.48
$4,141.52
$4,182.90
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
18
Replacement Analysis Technique #3
• Compare the EUAC of the defender over its stated life
against the minimum EUAC of the challenger.
•Here defining defender and challenger first costs
can be an issue.
•Trade-in value is not a suitable value.
•Appropriate value is the market value.
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
19