Engineering Economic Analysis

406 REPLACEMENT ANALYSIS l

Do WeHave Marginal Cost Data for the Defender?

Our decision map indicates that it is necessary to know whether marginal cost data are

available for the defender asset to detennine the appropriate replacement technique to

use. Usually in engineering economic problems annual savings and expenses are given

for all alternatives.However, as in Example 13-2, it is also necessary to have year-to-year

salvage value estimates to calculate total marginal costs. If the total marginal costs for the

defender can be calculated, and if the data are increasing on a year-to-year basis, then it

is appropriate to usereplacement analysis technique1 for comparing the defender to the

challenger.

Are These Marginal Costs Increasing?

We have seen that it is important to know whether the marginal cost for the defender is

increasing on a year-to-yearbasis. This is detennined by inspecting the total marginal cost

of ownershipof the defender over its remaininglife. Example 13-3illustrates the calculation

of the total marginal cost for the defender asset.

"An ~sset purchased 5 years agoror $75,000 Canbe sold today f9r$15,OOO.Operating expenses

in the pastp.ave been $10,000 per year, but these are estimated to increase in the future by

$1500 per year each year. lEis estiplated tbafthe marlcetvalue or the .old a$~etwi.1ldecrease

by $1000 per year over the next 5 years. If theMARR usedpyth~ company is 15%, calculate

lithetotal marginal cost of ownership of tbjs old asset (thatjs,~the defender) for eacQof the next

5 years.

II

I,I SOLUTION

I, __

;;Wecalculate the total marginal cost of majntaining the qld asset for the n~xt ?-::yearperioq as

::tollows;

lear, n

~!~I (^1) -
U 2II 3
II 4
5
Loss in Mar~et
Value in Year-n
15,000- 14,000$1000"
14,OQO- 13,000 _ 1000
13,000- 12,000 - 1000
12,000, "-C.--';'..,...11,000'.-.:.- ..',:--. tOQQ..'
11,000--10,000'. 1000
.]j'orgoneInterest
in:)~earn.'
15~000(0.q)C$~250
J,A,900(Q.};DJ," 2.lPD
13,OOO(o.l~Y - -J9iSO
12,OOO(0~~t5');"'-N ~180t>
It, 000(0. rs},. "'~,:1J~~Q'n 'co"~, -:;~..,,",'C'."..',:/!::-':":;:~ ',:2':: -:;,,,~:,-".~:-."
Qpef~Jing
Cost
i)) Yearn
$IQ,QOO
1'1,500
J3 000"'i.;...l .:'I:!io
14~500

• (^16000) ';"':';'-"~';;"i~ ',..
  M8t~at
  Cost'in
  Year 11
  $13250~ " ..".,
  i4,600
  15,,9SQ
  !T300,-",-"'-,.:;.'...,,".,~,"".
  18656":-~."".,t,,',,:L...,
  We can see that the marginal costs increase in each subsequent year of ownership. When
  the conditionof increasing marginal costs for the defenderhas been met, then the defender-
  challenger comparison is appropriatelymade by usingreplacementanalysis technique 1.
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