Engineering Economic Analysis

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WhatIs the Basic Comparisori?^415

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Year,n

o

1

:.2

3

4

5

Overhaul Cost

$4000

o

o

o

o

o

Maintenance Cost Margin81 Cost to Extend Service

$ 0

1800

1800

2800

3800

4800

$6120=4000(1.08) + 1800

1800

2800

3800

4800

Year 5 is the first year after the year with the lowest EUAC in which the $4800 marginal

cost for the defender exceeds the $4589 minimum EUAC for the challenger.Thus, the defender

should be kept 4 more years if costs do not change. (Note that if the defender can be overhauled-' :::; "

again after 3 years, that might be an even better choice.)

No Defender Marginal Cost Data Available

Earlier we described replacement analysis techniques for comparing the defender and

challenger if marginal cost data are available for the old asset. You may recall that yearly

salvage value estimates were necessary to calculate these marginal costs. Sometimes,how-

ever, it is difficultto obtain end-of-the-year salvage value estimates for the defender asset.

A defender based on aging technology with a shrinking market might be such an asset.

Or, from a student's problem-solving perspective, perhaps salvage value data are not given

as part of the problem data. Without these data, it is impossible to calculate the marginal

cost of the defender, and thus impossible to use marginal cost data to compare the defender

against the challenger.How should we proceed?

Given thereplacement repeatability assumptions,it is possible for us to calculate

the EUAC of the defender over its remaining useful life. Then, knowing that both the

defender and challenger will be replaced with indefinite cycles of the challenger, we may

usereplacementanalysis technique3 to compare defender and challenger.

Replacement Analysis Technique3:.

When Defender Marginal Cost Data Are Not Available

When our third method of analyzingthe defender asset against the best availablechallenger

is used, the basic comparison involves theEUAC of the defender over its stated useful life,

and the minimum EUAC of the challenger.

We will calculate the EUAC of the defender asset over its remaining useful life and

compare this directly against the EUAC of the challenger at its minimum cost life, and then

choose the lesser of these two values. However, in making this basic comparison an often

complicating factor is deciding what first cost to assign to the challenger and the defender

assets.

Defining Defender and Challenger First Costs

Becausethe defenderis alreadyin service,analystsoftenmisunderstandwhatfirstcostto

assignit. Example13-9demonstratesthisproblem. ..

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