Engineering Economic Analysis

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What Is the BasicComparison? 407

After-Tax Replacement Analysis

Defender Marginal Costs Can Be Computed and Are Increasing

When our firstmethod of analyzingthe defender asset against the best availablechallengeris

used, the basic comparisoninvolvesthemarginal cost data of the defender and the minimum

cost life data of the challenger,

In the case of the marginal cost of the defender increasing on a year-to-year basis, we

will maintain that defender as long as the marginal cost of keeping it one more year is less

.- than the minimum EUAC of the challenger. Thus our decision rule is as follows:

.I~
I

Maintain the defender as long as the marginal cost of ownership for one more year is

less than the minimum EUAC of the challenger. When the marginal cost of the defender

becomes greater than the minimum EUAC of the challenger, then replace the defender

with the challenger.

One can see that this technique assumes that the current best challenger, with its mini-

mum EUAC, will be available and unchanged in the future. However,it is easy to update a

replacement analysis when marginalcosts for the defender change or when there is a change

in the cost and/or performance of availablechallengers. Example 13-4illustrates the use of

this technique for comparing defender and challenger assets.

Takip.gthe machinery in Example 13-2 as thechallengerand the m~chineryin Example 13-3 as

theliefender,usereplacement analysis technique1 to determine when, if at all, a replacement

decision should be made.

SOLUTION

" -

Replacement analysis technique1 is appropriate only in the condition of increasing marginal'1

costs for the defender. Since these marginal costs are increasing for the defender (from,

Example 13-3), we can proceed by comparing defender marginal costs against the minimum

EUAC of the challenger asset. In Example 13-2we calculated only the marginal cost&of the chal-

leng~r; thus it is necessary to calculate the challenger's minimum EUAC. The EUAC of keeping

this asset for each year of its useful life is worked out as follows. "

Year,1I

1

2

3

4

5 !i:

6

7

c;hallenger

Total Marginal

<;]08tip Year"

$17,750

15,200

13,950

14,350

= 14,900

" 15,600

16,950

=

EUAC of Challenger Ownership

If Kept 'l'hrough Yearn a

[17,750(P/F,15%, 1)](A/P,15%, 1)=$17,750

[17,750(P/F,15%,1)+15,200(P/ F,15%, 2)](A/P,15%,2)16,560

[17,756(P/F,15%,1) +... +13,95Q(P/F,J5%,3)](A/P,IJ%,3) ..' 15,81.0

[17,750(P/P,15%, 1) + ... +14,350(P/F,15%,4)](A./J-\15%,4) 15,520'.

-=[17,;950(P7F,15%~1) f.. ::'¥'14;900(P7F;I3"%, 5)](~/J';"i'5%,"'5r ~. "15,43U

[17,750(P/F,15%, 1) +... +15,60Q(P/F,15%,6)](4/11,1~%,.~ == 15.450

__[!2.,750Ct!!~~ ~t. .~1~,2~Pi~J~, .wr0~7J~ ===~.5.8

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