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Lec 27 - Economic Life of Equipment

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29 views3 pages

Lec 27 - Economic Life of Equipment

Uploaded by

Madad Memon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CE-423 ENGINEERING ECONOMICS

DR ABDUL QAYOOM
Department of Civil Engineering
MUET SZAB Campus Khairpur Mir’s

LECTURE 27
ECONOMIC LIFE OF EQUIPMENT AND REPLACEMENT
DECISIONS
Definition:
Economic life refers to the period during which an asset is expected to contribute economically
viable services or generate revenue for a business.
Economic life is the expected period of time during which an asset remains useful to the
average owner. When an asset depreciates to the point it is no longer useful to its owner, then
it is said to be past its economic life. The economic life of an asset could be different than its
actual physical life. Thus, an asset can be in optimal physical condition but may not be
economically useful. For example, technology products often become obsolete when their
technology becomes obsolete. The obsolescence of flip phones occurred due to the advent of
smartphones and not because they ran out of utility.
Estimating the economic life of an asset is important for businesses so that they can determine
when it's worthwhile to invest in new equipment, allocating appropriate funds to purchase
replacements once the equipment's useful life is met.
Factors Affecting Economic Life:
1. Technological Obsolescence:
Advances in technology can render equipment outdated, reducing its economic life.
2. Physical Wear and Tear:
The wear and tear of machinery over time can decrease its efficiency and reliability, affecting
its economic life.
3. Maintenance and Repairs:
Regular maintenance and timely repairs can extend the economic life of equipment.
4. Environmental Conditions:
Harsh environmental factors such as temperature, humidity, and corrosive substances can
impact equipment lifespan.
Financial considerations regarding the economic life of an asset include the cost at the time of
purchase, the amount of time the asset can be used in production, the time at which it will need
to be replaced, and the cost of maintenance or replacement. Changes in industry standards or
regulations may also be involved.

57
CE-423 ENGINEERING ECONOMICS
DR ABDUL QAYOOM
Department of Civil Engineering
MUET SZAB Campus Khairpur Mir’s

New regulations may render current equipment obsolete or raise the required industry standards
for an asset beyond the specifications of a business's existing assets. Further, the economic life
on one asset may be tied to the useful life of another. In cases where two separate assets are
required to complete a task, the loss of one asset may render the second asset useless until the
first asset is repaired or replaced.
Determining Economic Life:
1. Financial Analysis:
Businesses conduct cost-benefit analyses to determine the optimal economic life of equipment
based on factors such as initial cost, maintenance expenses, salvage value, and operational
efficiencies over time.
2. Industry Standards:
Industries often have benchmarks or guidelines for the economic life of equipment based on
historical data and best practices.
Replacement Decision:
Definition: The replacement decision involves evaluating whether to replace existing
equipment with new equipment or continue using the current equipment.
Factors Influencing Replacement Decision:
1. Age and Condition:
The age and condition of the equipment play a significant role. Older equipment may require
more maintenance and have higher downtime.
2. Technological Advancements
Newer equipment may offer improved efficiency, productivity, and features compared to older
models.
3. Cost Considerations
The costs associated with purchasing, installing, operating, and maintaining new equipment
versus continuing with existing equipment are crucial factors.
4. Regulatory Compliance
Changes in regulations or industry standards may necessitate equipment upgrades or
replacements.
5. Strategic Objectives:

58
CE-423 ENGINEERING ECONOMICS
DR ABDUL QAYOOM
Department of Civil Engineering
MUET SZAB Campus Khairpur Mir’s

Business strategy, growth plans, and operational requirements can influence the decision to
replace equipment.
Decision-Making Process:
1. Cost-Benefit Analysis:
Businesses perform a detailed cost-benefit analysis comparing the costs and benefits of
equipment replacement, considering factors like initial investment, operational savings,
maintenance costs, and potential revenue increases.
2. Risk Assessment:
Risks associated with equipment failure, downtime, and technological obsolescence are
evaluated.
3. Long-Term Planning:
Replacement decisions are often part of long-term asset management and capital budgeting
strategies aligned with the organization's goals and financial capabilities.
In summary, managing the economic life of equipment involves assessing its productive
lifespan, while the replacement decision involves analysing costs, benefits, and risks to
determine whether replacing equipment is economically justified based on factors such as
technological advancements, maintenance costs, and operational efficiencies. These decisions
are integral to maintaining operational efficiency, managing costs, and supporting business
growth.

59

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