CHAPTER-6: REPLACEMENT ANALYSIS
1. [Replacement Analysis] The existing machine has a market value of Rs 25,000 and the
new machine cost of Rs 37,500. Both have a same life of 3 years with salvage value
zero at end. Their operating costs are given below. Assume MARR = 12%
EOY O&M (Defender) O&M (Challenger)
1 8,500 2,500
2 10,000 5,500
3 12,500 6,500
a. Determine the Equivalent Uniform Annual Cost (EUAC) of defender and
challenger.
b. Should the company replace the defender with challenger?
Solution,
EUAC (Defender) = [-25,000(F/P,12%,3) – 8,500 (F/P,12%,2) – 10,000 (F/P,12%,2)-
12,500] *(A/F,12%,3) = -Rs 20591.98
EUAC (Challenger) = [-37,500(F/P,12%,3) – 2,500 (F/P,12%,2) – 5,500 (F/P,12%,2)- 6,500]
*(A/F,12%,3) = -Rs 20295
So, replacement should be made.
2. [ESL of Defender] A 3-year-old manufacturing process asset is being considered for
early replacement. Its current market value is $13,000. Estimated future market values
and annual operating costs for the next 5 years are given in following Table columns 2
and 3. What is the economic service life of this defender if the interest rate is 10% per
year?
Year Market Value Operating & Maintenance (O&M)
1 $9000 $2500
2 8000 2700
3 6000 3000
4 2000 3500
5 0 4500
We have, EUAC = CR + O&M
EUAC (year1) = [-13,000(F/P,10%,1) + 9,000] *(A/F,10%,1) +2500 = -Rs 7800
EUAC (year2) = [-13,000(F/P,10%,2) + 8,000] *(A/F,10%,2) +[2500(F/P,10%,1)+2700]
*(A/F,10%,2) = -Rs 6276
OR EUAC (year2) = [-13,000(F/P,10%,2) + 8,000 +2500(F/P,10%,1)+2700] *(A/F,10%,2) =
-Rs 6276
Similarly,
EUAC (year3) = -Rs 6132
EUAC (year4) = -Rs 6556
EUAC (year5) = -Rs 6579
Therefore, the economic service life of this defender is 3 years. Since it has lowest EUAC
of Rs 6,132.
MGTS 301 (ENGINEERING ECONOMY), Kathmandu University
By Punya Ram Sujakhu (9841395153)
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