Engineering Economic Analysis

408 REPLACEMENTANALYSIS

A minimumEUAGof $15,430is attainedfor the challengerat Year5, whichis the challenger's

minimum cost life.Weproceed by comparing this value against themarginalcosts of the defender

from Example 13-3:

Defender Total

Marginal Cost.

in Yearn ~

~13?250

CbatIenger

M1nmuInlEtJAC

$15,430

(^2) 14,600 15,430
COlIlpariso~
Result and Recolnnlcndanon
Since $13,250is ressthqn $15,430,
keep def~nder.
Since$t4,600is.less than $15,430,
keep defender.
Since$J5,950 isgreatel; t1Jqn$15,4~O,
replace defender. Qi i"1.
Year,n
1
II

. ;;; II^3 15,950

I
I

a

One may ask,Why can't replacementanalysis technique 1 be used when the marginai

costs of the defender do not increase?To answer this question we must understand that

for this technique to be valid, the following basic assumptions must be valid: the best

challenger will be available "with the same minimum EUAC" at any time in the future; and

the period of needed service in our business is indefinitelylong. In other words, we assume

that once the decision has been made to replace, there will be an indefiilite replacement

of the defender, with continuing "cycles" of the current best challenger asset. These two

assumptions together are much like the repeatability assumptions that allowed us to use the

annual cost method from earlier chapters to compare competing alternatives with different

useful lives. Taken together, we call these the replacement repeatability assumptions.

They allow us to greatly simplify the comparison of the defender and the challenger. We

state these assumptions formally below.

Repeatability Assumptions Not Acceptable

The two assumptions are as follows:

1. The currently available best challenger will continue to be available in subsequent
   years and will be unchanged in its economic costs. When the defender is ultimately
   replaced, it will be replaced with this challenger. Any challengers put into service
   will also be replaced with the same currently available challenger.


2. The period of needed service of the asset is indefinitely long. Thus the challenger
   asset, once put into service, will continuouslyreplace itself in repeating, unchanged
   cycles.