Replacement Analysis

1
Chapter 11

• Replacement Analysis

2
Replacement Study
No study period specified
Study period specified
Perform ESL analysis
Develop succession options for D and C using AWD
and AWC
PW or AW for each option
AWD
AWC
3
Example (page 407)

• Three years ago Chicagos Ohare Airport
  purchased a new fire truck. Because of flight
  increase, new fire-fighting capacity is needed
  once again. An additional truck of the same
  capacity can be purchased now, or a
  double-capacity truck can replace the current
  fire truck. Estimates are presented below.
  Compare the options at 12 per year using (a) a
  12-year study period and (b) a 9-year study
  period.

4
Example

• Presently Owned
  New Purchase Double capacity
• First cost, -151,000 (3 years ago)
  -175,000 -190,000
• AOC, -1,500
  -1,500 -2,500
• Market value, 10 of P
  12 of P 10 of P
• Life, years 12
  12 12
• Solution
• Option
  1 Option 2
• Presently owned
  Augmentation Double Capacity
• P, -70,000
  -175,000 -190,000
• AOC, -1,500
  -1,500 -2,500
• S, 15,100
  21,000 19,000
• Years 9
  12 12

5
Solution

• A) n12
• AW1 AWPresent AWAugmentation
• -70,000(A/P,12,9)
  15,100(A/F,12,9) -1500
• -175,000(A/P,12,12)
  21,000(A/F,12,12) -1500
• -42,498
• AW2 -190,000(A/P, 12,12) 19,000
  (A/F,12,12) 2500
• -32,386
• Replace with double-capacity now.

6
Solution

• b) n9
• AW1 AWPresent AWAugmentation
• -70,000(A/P,12,9)
  15,100(A/F,12,9) -1500
• -175,000(A/P,12,9)
  21,000(A/F,12,9) -1500
• -70,000(0.18768) 15,000(0.06768)
  1500
• -175,000(0.18768) 21,000(0.06768)
  -1500
• -46,539
• AW2 -190,000(A/P, 12,9) 19,000 (A/F,12,9)
  2500
• -190,000(0.18768) 19,000 (0.06768) -
  2500
• -36,873
• Replace with double-capacity now.

7
Example

• An engineer estimates that the equivalent annual
  worth of an existing machine over its remaining
  useful life of 3 years is -70,000 per year. It
  can be replaced now or after 3 years with a
  machine that will have an AW of -90,000 per year
  if it is kept for 2 years or less, -80,000 per
  year if it is kept for 3 and 5 years, and
  -110,000 per year if it is kept for 6 to 8
  years. (a) The company wants an analysis of what
  the projected AW values will be for study periods
  of length 5 through 8 years at an interest rate
  of 15 per year. (b) Which study yields the
  lowest AW, and what is the value?

8
Solution

• Option Defender Challenger
• 1 0 5
• 2 0 6
• 3 0 7
• 4 0 8
• 5 3 2
• 6 3 3
• 7 3 4
• 8 3 5

9
Solution

• AW5 -70,000(P/A, 15,3) 90,000 (P/A,15,2)
  (P/F, 15, 3)(A/P, 15, 5)
• -76,378
• AW6 -70,000(P/A, 15, 3) -80,000(P/A, 15, 3)
  (P/F, 15, 3) (A/P, 15, 6)
• -73,967
• AW7 -70,000(P/A, 15, 3) 80,000(P/A, 15,
  4)(P/F, 15, 3)(A/P, 15,7)
• -74,512
• AW8 -70,000(P/A, 15, 3) 80,000(P/A,
  15,5)(P/F, 15, 5)(A/P, 15,8)
• -74,912