,
400 REPLACEMENTANALYSIS
Up to this point in our economic analysis we have considered the evaluation and selection
ofnewalternatives. Which new car or washing machine should we purchase? What new
material handling system or ceramic grinder should we install? However,a choice between
new alternatives is not always what we must consider--economic analysis weighs more
frequentlyexistingversusnewfacilities. For most engineers the problem is less likely to be
one of building a new plant; rather the goal is more often keeping a present plant operating
economically.We are not choosing between new ways to perform the desired task. Instead,
we have equipment performing the task, and the question is, Should the existing equipment
be retained or replaced? This adversarial situation has given rise to the terms defender
and challenger. The defender is the existing equipment; the challenger is the best available
replacement equipment. An economicevaluationof the existingdefender and the challenger
replacement is the domain of replacement analysis.The Replacement Problem 13 REPLACEMENTANALYSIS
The replacement of an existing asset may be appropriate in various situations including
obsolescence, depletion, and deterioration due to aging. In each of these cases, the ability
of a previously implemented business asset to produce a desired output is challenged. For
cases of obsolescence, depletion, and aging, it may be economical to replace the existing
asset. We define each of these situations.Obsolescence:Occurs when the technology of an asset is surpassed by newer and/or
different technologies. Changes in technology cause subsequent changes in the
market demand for older assets. As an example, today's personal computers(PCs)
with more RAM, faster clock speeds, largerhard drives,and more powerfulcentral
processors have made older, less powerful PCs obsolete.Thus, obsolete assets may
need to be replaced with newer, more technologically advanced ones..Depletion: The gradual loss of market value of an asset as it is being consumed or
exhausted. Oil wells and timber tracts are examples of such assets. In most cases
the asset will be used until it is depleted, at which time a replacement asset will be
obtained. Depletion was treated in Chapter 11...Deterioration due to aging:The general conditionofloss in value of some asset due to
the aging process. Production machinery and other business assets that were once
new eventually become aged. To compensate for a loss in functionality due to the
aging process, additional operatingand maintenanceexpenses are usually incurred
to maintain the asset at its operating efficiency.Aging equipment often has a greater risk of breakdowns.Planned replaceII}entscan be
scheduled to minimize the time and cost of disruptions. Unplanned replacements can be
very costly or even, as with an airplane engine, potentially catastrophic.
In industry, as in government, expenditures are normally monitored by means of
annual budgets.One important facet of a budget is the allocation of money for new capital
expenditures, either new facilities or replacement and upgrading of existing facilities.