Engineering Economic Analysis

404 REPLACEMENTANALYSIS l

EUAC of Capital Recovery

EUAC 9fMllintenance and Repair

#EUAC ofpperating

--t- Total EUAC

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I~IGURE13-3 Plot ofcostS.fot Example 13.:1.

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Looking at Figure 13-3 a bit more closely, we see the effects of each of the individual cost

components on total EUAC (capital recovery, maintenance/repair,and operating expense

EUACs) and how they behave over time. The total EUAC curve of most assets tends to

follow this concave shape-high at the beginning due to capital recovery costs, and high at

the end due to increased maintenance/repairand operating expenses. The minimum EUAC

occurs somewhere between these high points.

Use of Marginal Cost Data

Once the basic participants in the defender-challengercomparisonhavebeen identified(see

Figure 13-1),two specificquestionsregardingmarginalcosts must be answered:Do we have

marginal cost datafor the defender?andAre the defender's marginal costs increasing on

a year-to-year basis?Let us first define marginalcost and then discuss why is it important

to answer these two questions.

Marginalcosts, as opposed to an EUAC, are the year-by-year costs associated with

keeping an asset. Therefore, the "period" of any yearly marginal cost associated with own-.

ership is always1year.On the other hand, an EUACcan apply to any number of consecutive

years. Thus, the marginal cost of ownershipfor any year in the life of an asset is the cost for

that year only.In replacementproblems, the total marginalcost for any year can include the

capital recovery cost (loss in market value and lost interest for the year), yearly operating

and maintenancecosts, yearly taxes and insurance,and any other expense that occurs during

that year. To calculate the yearly marginal cost of ownership of an asset it is necessary to

have estimates of an asset's market value on a year-to-year basis over its useful life, as

well as ordinary yearly expenses. Example 13-2illustrates how total marginal cost can be

calculated for an asset.

$1'1,000

$10,000

$9,000

$8,000--

;;r $,7,000

0 $6,000

U $5,000 I r".

$4,000

r; -$3,Q90
ilfl $4,OOO
.. $1,000
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