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Replacement Analysis: Shah Murtoza Morshed

This chapter discusses replacement analysis and different types of replacement problems. [1] Replacement problems deal with replacing items like machines that decrease in efficiency over time or suddenly fail. [2] There are two types of replacement problems - those dealing with gradual deterioration over time, and those dealing with sudden complete failure. [3] For equipment that deteriorates, the economic service life is the point where the total annual cost is minimized by balancing decreasing capital costs and increasing maintenance costs over the life of the asset.

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54 views12 pages

Replacement Analysis: Shah Murtoza Morshed

This chapter discusses replacement analysis and different types of replacement problems. [1] Replacement problems deal with replacing items like machines that decrease in efficiency over time or suddenly fail. [2] There are two types of replacement problems - those dealing with gradual deterioration over time, and those dealing with sudden complete failure. [3] For equipment that deteriorates, the economic service life is the point where the total annual cost is minimized by balancing decreasing capital costs and increasing maintenance costs over the life of the asset.

Uploaded by

SarkarAhmmedRedwan Suvro
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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HUM 2107: Engineering Economy

CHAPTER 04:
REPLACEMENT ANALYSIS

SHAH MURTOZA MORSHED


Why is replacement needed?

The replacement problems are concerned with the situations that arise when some items such as men,
machines and usable things etc. need replacement due to their decreased efficiency, failure or breakdown.
Such decreased efficiency or complete breakdown may either be gradual or all of a sudden.

If a firm wants to survive the competition it has to decide on whether to replace the out dated equipment or
to retain it, by taking the cost of maintenance and operation into account.
Types of Replacement Problem

The replacement problem can be classified into two categories.

i) Replacement of assets that deteriorate with time (replacement due to gradual failure, due to wear and tear
of the components of the machines) this can be further classified into the following types.
a) Determination of economic type of an asset.
b) Replacement of an existing asset with a new asset.

ii) Simple probabilistic model for assets which will fail completely (replacement due to sudden failure).

gradual failure sudden failure


Economic service Life of an asset (ESL)

▪ Any asset will have the following cost components


i) Capital recovery cost (average first cost), Computed form the first cost (Purchase price) of the asset.
ii) Average operating and maintenance cost.
iii) Total cost (annual equivalent cost) which is the sum of capital recovery cost (average first cost) and average operating and
maintenance cost.

▪ From figure, when the life of the machine increases, it is clear that the
capital recovery cost (average first cost) goes on decreasing and the
average operating and maintenance cost goes on increasing. From the
beginning the total cost goes on decreasing up to a particular life of the
asset and then it starts increasing. The total cost in the minimum of “n”
year is called the Economic service life of the asset.

• Economic service life is the remaining useful life of an asset that


results in the minimum annual equivalent cost.
Problem 01

▪ A firm is considering replacement of equipment whose first cost is Rs. 1750 and the scrap value is
negligible at any year. Based on experience, it is found that maintenance cost is zero during the first year
and it increases by Rs. 100 every year thereafter.

▪ When should be the equipment replaced if (a) i = 0% & (b) i = 12%


Solution 01

(a) Interest rate i = 0%

End of year (n) Maintenance Summation of Average cost of Average first


(A) cost maintenance maintenance cost
through the given
at end of year cost Total Cost
year
(B) =C
D=
1 0 0 0 1750 1750
2 100 100 50 875 925
3 200 300 100 583 683
4 300 600 150 438 588
5 400 1000 200 350 550
6 500 1500 250 292 542
7 600 2100 300 250 550
8 700 2800 350 219 569
Solution 01

(b) Interest rate i = 12%

Present worth as Summation of Present simulator


beginning of present worth of maintenance cost
Maintenance cost years of maintenanc e and first cost
End of year (n) Annual equivalent
at end of year (P/F,12% ,n) maintenanc e costs through the (A/P,12% ,n)
(A) total cost
(B) costs given year F=E + 1750
(C)
D=B×C E (G) H =F
1 0 0.8929 0 0 1750 1.1200 1960
2 100 0.7972 79.72 79.72 1829.72 0.5917 1082.6
3 200 0.7118 142.36 222.08 1972.08 0.4163 820.9
4 300 0.6355 190.65 412.73 2162.73 0.3292 711.9
5 400 0.5674 226.96 639.69 2389.69 0.2774 662.9
6 500 0.5066 253.30 892.99 2642.99 0.2432 642.7
7 600 0.4524 271.44 1164.43 2914.430 0.2191 638.5
8 700 0.4039 282.73 1447.16 3197.16 0.2013 680.7
Replacement Decisions

Defender: an old/existing machine


Challenger: a new/alternative machine
Current market value: selling price of the
defender in the market place
Defender

❑ Decision Rules:
❖ Step 1: Compute the AECs for both the defender and
challenger at its economic service life, respectively.
❖ Step 2: Compare AECD* and AECC*.
1. If AECD* > AECC* , replace the defender now.
2. If AECD* < AECC* , keep the defender at least for
the duration of its economic service life if there are Challenger
no technological changes over that life.
Formula
Consider the following data for calculation,
P = Purchase price of the Machine
F = Salvage value of the Machine
AOC = Annual Operating Cost
n = Life of machine in years
i = interest rate

For uniformity,
AEC = P*(A/P, i, n) + AOC - F*(A/F, i, n)
Problem 02
Simple probabilistic model

Electronic items like bulbs, resistors, tube lights etc. generally fail all of a sudden, instead of gradual
failure. The sudden failure of the item results in complete breakdown of the system. The system may
contain a collection of such items or just an item like a single tube-light. Hence we use some replacement
policy for such items which would minimize the possibility of complete breakdown.

The following are the replacement policies which are applicable in these cases.
i) Individual replacement policy: - Under this policy, each item is replaced immediately after failure.
ii) Group replacement policy:- Under group replacement policy, a decision is made with regard the
replacement at what equal internals, all the item are to be replaced simultaneously with a provision to
replace the items individually which fail during the fixed group replacement period.
THE END

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