... .... .-. -.-.......-
What Is the Basic Comparison? 409
~I
Given that the defender will ultimately be replaced with the current best challenger,we
would not want to ever incur a defendermarginal cost greaterthan the challenger's minimum
EUAC. And because the defender's marginal costs are increasing, we can be assured that
once the marginal cost of the defender has become greater than the challenger's minimum
EUAC,it will continue to be so in the future. However,if the marginal costs do not increase,
we have no guaranteethatreplacementanalysis technique1 will produce the alternativethat
is of the greatest economic advantage.One may ask,Are there ordinaryconditions in whiah
the marginal costs are not increasing?The answer to this question is yes. Consider the new
asset in Example 13-2.This new asset has marginal costs that begin at a high of $17,750,then
decreaseover the next years to a low of $13,950, and thenincreasethereafter to $16,950 in
Year 7. If this asset were implemented and then evaluatedone year after implementationas
a defender asset, it would not have increasing marginal costs. Thus, defenders in the early.
stages of their respective implementations would not fit the requirements ofreplacement
analysis technique1. In.the situation graphed in Figure 13-3, such defender assets would be
in the downward slope of a concave marginal cost curve. Example 13-5 illustrates the error
that can be introduced whenreplacement analysis technique1 is applied when defen~ers
do not have consistently increasing marginal cost curves.
t..~. -- ..,~_.'. ,,_v ... -.. ,. .~,. -,
~ Letuslookagainat thedefenderandchallengerassetsinExample13-4.Thistimeletus arbitrarily
change the defender's marginal costs for its 5-year useful life. Now when, if at all, should the
defender be replaced with the challenger?
Defender Total Marginal
Cost in Yearn
$16,000
14,000
13,500
15,300
17,500
II
Year,n
1
2
3
4
5
SOLUTION
=
IIIthi$case the total marginalcosts of the defender arenotconsistentlyincreasingfrom year to year.
:a()w~ver,ifwe ignore this fact and applyreplacementanalysis technique1, the recoIIlI)1endati9n
woulg be to replace the defender now, because the marginal cost of the defender for the first
year t$J6,OOO)is greater than.th,eminimUITlEUAC of the challenger ($15,430). Let usteview
this d~ci$ion. One can see that' the first-year marginal cost of the defender is greater than.the
miniJji1iID.aUA.C:of the c:hallenger,bittin the secondthroughfourthyearsthe marginalcoStsare
less.Wus marginalcostsdecrease4e.refor3 yearsto a minimumapdthenincreasethefollowing~,
:2 ye~; ..~ ~ .. ~. =; ~ ~ = == == ;;. ;; -~~=. = a ~ ~:; =. -
xitUs calculate the EUAC of k~epiIi15the defender asset each of its remaining 5 years, at
i...:.lft%.""
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