Engineering Economic Analysis

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414 REPLACEMENTANALYSIS

An economic analysis is to be made to detennine whether existing (defender) equipment in an

industrial plant should be replaced. A $4000 overhaul must be done now if the equipment is to be

retained in service. Maintenanceis estimated at $1800 in each of the next 2 years, after which it is

expected to increase by $1000 each year. The defender has no present or future salvage value. The

equipment described in Example 13-1is the challenger.Make a replacementanalysis to determiIie

whether to retain the defender or replace it by the challenger if 8% interest is used.

SOLUTION

The first step is to detennine the lowest EUAC of the defender. The pattern of overhaul and

maintenance costs (Figure 13-5) suggests that if the overhaul is done, the equipment should be

kept for several years. The computation is as follows:

If Retired at End of Year n

Year,n

EUAC of Overhaul

$4000(A/I', 8%, n) Total EUAC

EUACof Maintenance $1800 + $1000

Gradient from Year3 on

1

2

3

4

5

$4320

2243

1552

1208

1002

$6120

4043

3660+-

3691

3881.

$1800

1800

1800 + 308*

1800 + 683t

1800 + 1079

*For the first 3' years, the maintenance is $1800, $1800, and $2800. Thus, EUAC = 1800 +

1000(Aj F,8%, 3) = 1800 + 308.

tEUAC = 1800 + loo0(P jG, 8%,3)(P j F,8%,1)(Aj P,8%,4) = 1800 + 683.

FIGURE 13-5 Overhaul and maintenance costs for the

defender in Example 13-8.

4800

4000

r

3800

r

2800

f

1800 1800

t t

0~1~2~3~4~5

Year

The lowestEUACof the defenderis $3660.In Example 13~1,we determinedthat the minimum

cost life of the challenger is 4 years and that the resulting EUAC is $4589. If we assume the

equipment is needed for at least 4 years, the EUAC of the defender ($3660) is less than the EtJAC

of the challenger ($4589). In this sifuation the defender should not be replaced yet.

If the defender's and challenger's cost data do not change, we can usereplacement analysis

technique1 ,todetennine- when=the,defehder~houldb-M'epJ.a'COO.W~Kii5W; nom I"the.1hifi.ii'fihm :

EUAC calculation that the defender should be kept at least 3 years. Is this the best life? The

following table computes the marginal cost to answer this question... " _ 1IftI:III!In:I= ~;;r:~ II 1111;~ '" 1:1" '.I; ~

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