IEN255 Chapter 10 - Replacement Analysis

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IEN255 Chapter 10 - Replacement Analysis

• 4-6 best investment alternative
• How to add profit
• but what about not increasing sales, but
  maintaining profit?
• Three aspects
• defender vs challenger
• determination of economic service life
• replacement analysis when service period is long

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Defender vs Challenger

• Challenger - best available replacement system

Defender - existing machine (or system)
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Current market value

• We will replace everything!!!
• Its just when?
• Is now the time?
• What is it worth now?

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Relevant info on market value

• Original Cost
• Book Value
• Market Value
• Trade-In allowance

Which One?
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Sunk Costs

• Past Cost Unaffected by Future
• Decisions
• Tricky Part!!!

Figure 10.1
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Gains and Losses on Disposal

• fig 10.2

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Cash Flow Approach (Keep)

• watch for UNEQUAL LIVES!!!!!

table 10.1
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Cash Flow Approach (Replace)

• table 10.2

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Compare

• fig 10.3 and all four equations below

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Opportunity Cost Approach

• fig 10.4 and four equations below

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Economic Service Life

• Economic Service Life - period of useful life
  that minimizes the equivalent annual cost of
  owning and operating the asset
• n1 and n2 from bottom of 518

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Economic Service Life cont

• table 10.3

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Economic Service Life

• table 10.4

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Economic Service Life

• table 10.5

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Economic Service Life

• fig 10.5

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Economic Service Life

• fig 10.6 graph

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Long Service Required

• If not now, when?
• Planning
• Technology
• Revenue and Cost Patterns
• Decision frameworks
• fig 10.7

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Replacement Strategies

• Steps
• Economic Service Life
• Defender
• Challenger
• Optimal Time to Replace the Defender
• next pages tables 10.6, 10.7a, 10.7b, fig 10.8
• and pg 533

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AE or not to AE?

• fig 10.9

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AE (continued)

• bottom of page 534 and top of 536

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Finite Horizon

• Solution 10.7
• and next page 538 and 539

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Technology Change

• wait until technology improves

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IEN255 Summer99 Chapter 10 HW4

• Homework Assignment
• Chapter 10
• s 10.4 10.6 10.24
• Due with chapter 11 homework (likely Tues July
  27)