Engineering Economic Analysis

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What Is the Basic Comparison? 401

Replacement analysis may, therefore, produce a recommendation that certain equip-

ment be replaced and money for the rephicement be included in the capital expenditures

budget. Even if there is no recommendation to replace the equipment at the current time,

such a recommendation may be made the following year or subsequently.Atsomepoint,

the existing equipment will bereplaced, either when it is no longer necessary or when better

equipment is available.Thus, the question is notifthe defender will be replaced, butwhl!n

it will be replaced. This leads us to the first aspect of the defender-challenger comparison:

Shall we replace the defender no}1l, or shall we keep it for one or more additional years?

Replacement Analysis Decision Maps

Figure 13-1 is a basic decision map for conducting a replacement analysis.

Defender

Identify

Participants

of COI11parison

Best Challenger

Available Not Available

No Find LowestEUAC for

Defender

Find

EUAC Over

Given Life

Analysis Technique. I

iCompare the next-year

I:marginal cost of the defender

with the EUAC of the

challenger.

Analysis Technique 2

Compare the lowest EUAC

of the defender with the

EUAC of the challenger at

its minimum cosf'ijfe;

""-0.

Analysis Technique 3

Lacking defender rnarg!palcost data.

compare the EUAC of defender over

its remaining useful life,with the EUAC

of challenger at its minimum cost life.

FIGURE 13-1 Replacement analysis decision map.

Looking at the map, we can see.there are threereplacement analysis techniquesthat are

appropriate under different circumstances.The appropriate replacement analysis technique

to use in making a replacement comparison of old versus new asset is a function of the data

available for the alternativesand how the data behave over time..

WHAT Is THE BASIC COMPARISON?

By looking at the replacement analysis map, we see that the first step is to identify the basic

participants of the economic comparison. Again, in replacement analysis we are interested

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