Engineering Economic Analysis

r

What Is the Basic Comparison? 413

If Retired at Endof Year n

Years of

Remaining

Life, n

Estimated Salvage

Value (5) at

End of Year n

Estimated

Maintenance

Cost for Year

EUACof EUACof

Capital Recovery Maintenance

(P S) x(AI P,10%, n) +Si 100(AI G, 10%, n)Total "EUAC

$ 0

48

94

138

181

222

262

300

337

372

406

$l5,QQ

1262

1198

1177

1172

1111

1078

1062

1058+-

1060

1068

SOLUTION

A mWimumEUAC of $1,058is computed at Year 9 ,forthe:existing machiI.le.

Looking again at Examples 13-6and 13-7,we find that the two cases represent the same

machine being examined at different points in its life. (In Year 6 and later in Example 13-7

the costs match those of Example 13-6.)Example 13-7indicates that the 5-year-old machine

has a minimum EUAC at a life of 9 years.

For older equipment with a negligible or stable salvage value, it is likely that the

operating and maintenance costs are increasing. Under these circumstances, the useful life

at which EUAC is a minimum is 1 year.

It is necessary to calculate the defender's minimum EUAC when marginal costs are

not consistently increasing. Having made this calculation, we can now usereplacement

analysis technique2 to compare the defender against the challenger.

Replacement Analysis Technique 2:

Defender Marginal Cost Can Be Computed and Is Not Increasing

Using our second method of analyzing the defender asset against the best available chal-

lenger the basic comparison involvesthelowest EUAC of the defender and the EUAC of the

challenger at its minimum cost life.

We calculate the minimum EUAC of the defender and compare this directly against

the minimum EUAC of the challenger. Remember that thereplacement repeatability as-

sumptionsallow us to do this. In this comparison we then choose the alternative with !he

lowest EUAC. In Example 13-5 the comparison involved the defender with the lowest

EUAC= $14,618at a life of 3 years and the challenger with an economic life of 5 years

and EUAC=$15,430. Here we would recommend that the defender be retained for 4 more

years, as its marginal costs for later years will be increasing above the challenger's EUAC.

Then,replacement analysis technique 1would apply. Consider Example 13-8. ~

J

0 p=$5000

(^14000) .$ (^0) $1100 + 400
(^23500100) 864 + 350
(^33000200) 804 + 300
(^42500300) 789 + 250
(^52000400) 791 + 200
(^62000500) 689 + 200
7.1 2000 600 616 +- 200
(^82000700) 562 + 200
9 2000 800 521 + 200
10 2000 900 488 + 200
11 2000 1000 462 + 200