Replacement & Assessment

Engineer ing
INE 428
Evaluation Scheme
Mid term test 10
Assignment Problem in Class 10 30
Lectures and projects 10
Final exam 70
Total 100

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Chapter 1

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 Learning Objectives
After completing this chapter, students will be able to:
Understand the fundamentals of replacement analysis
Understand the main reasons of Replacement
Apply the Average annual costs for replacement analysis
Apply the equivalent Annual Cost for replacement
Understand Economic Life for Cyclic Replacements
Understand the replacement of Items that Fail Suddenly
Apply the individual and group replacement policy
Understand and solve the Staff Replacement Problem
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 Introduction
Replacement define as Substitution of an
item with a similar or different, inferior or
superior item.
A replacement decision is a choice between
the present asset, sometimes called the
defender, and currently available
replacement alternatives, sometimes called
challengers.

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Replacement Analysis

Should the existing equipment be retained or

replaced?
The Defender is the existing equipment.
The Challenger is the best available
replacement equipment.
If the defender proves more economical, it will
be retained. If the challenger proves more
economical, it will be installed.

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 Why Replacement
1. the physical deterioration of parts
2. Decreasing productivity
3. increasing costs of operation
4. higher scrap and rework costs
5. lost sales
6. larger maintenance expenses
7. New requirements of accuracy, speed, or
other specifications.
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 Why Replacement
Reduced Performance:
Wear and Tear;
Decreasing reliability and Productivity;
Increasing operating and maintenance costs.
Altered Requirements:
New production needs, accuracy, speed, etc.
Obsolescence:
Current assets may be less productive;
Not state of the art meet competition.

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 Manufacturing Cost Structure
Profit
Selling
Price
Sales
Expenses Total
Cost
General
Expenses Manuf.
Cost
Factory
Expenses Factory
Cost
Direct
Materials Prime
Cost
Direct
Labor

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 Replacement of Items
1- Average Annual Cost
I. When time is a continuous variable
Let C: Capital cost of item,
S: Scrap value of the item, Salvage value
T (ave): Average annual cost of the item,
n: Number of years the item is to be in use,
f (t): Operating and maintenance cost of the
item at time t.
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 I. When time is a continuous variable

Annual cost of the item at any time t

= capital cost - scrap value + maintenance
cost at time t
=C S + f (t) n

Total Cost for n year T (n) = C - S + f (t )dt

0

n
1
Tave = [C S + f (t )dt ]
Average Annual Cost n 0
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I. When time is a continuous variable

n
d 1 1 1
dn
(Tave ) = 2 [C S ] 2
n n
0
f (t )dt + f (n) = 0
n

n
1
f (n) = [C S + f (t )dt ] = Tave
n 0

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ii. When time is a discrete variable

n
1
Tave = [C S + f (t )]
n 0

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Example 1
The cost of a machine is $6100 and the scrap value
is $100 at any time. The maintenance costs found
from experience are as follows:
P=$6100 S=$100 at any time.

year 1 2 3 4 5 6 7 8
Maintenance 100 250 400 600 900 1200 1600 2000
cost $

When should the machine be replaced?

n
1
Tave = [C S + f (t )]
n 0 14
 Solution
n n
n C-S f(t)
f (t )
0
C - S + f (t )
0
Tav
1 6000 100 100 6100 6100

2 6000 250 350 6350 3175

3 6000 400 750 6750 2250

4 6000 600 1350 7350 1837.5

5 6000 900 2250 8250 1650

6 6000 1200 3450 9450 1575

7 6000 1600 5050 11050 1578

8 6000 2000 7050 13050 1631

The machine should be replaced after 6 years

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Example 2
The Purchase cost of a machine is $7000, the resale
value and maintenance costs are given below:

P$7000
Year 1 2 3 4 5 6 7 8

MC cost $ 900 1200 1600 2100 2800 3700 4700 5900

Resale $ 4000 2000 1200 600 500 400 400 40

When should the machine be replaced?

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Solution
n
n C-S f(t) f (t )
n
C - S + f (t ) T av
0 0

1 3000 900 900 3900 3900

2 5000 1200 2100 7100 3550
3 5800 1600 3700 9500 3166.67
4 6400 2100 5800 12200 3050
5 6500 2800 8600 15100 3020
6 6600 3700 12300 18900 3150
7 6600 4700 17000 23600 3371.43
8 6600 5900 22900 29500 3687.5

The machine should be replaced after 5 years

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Example 3
(a) Machine A costs $9,000. Annual operating costs
are $200 for the first year, and increase by $2,000
every year. Determine the best age at which to
replace the machine. If the optimum replacement
policy is followed, what will be the average yearly
cost of owning and operating the machine? Assume
that the machine has no resale value when replaced
and that future costs are not discounted.
(b) Machine B costs $10,000; annual operating
costs are $400 for the first year and then increase
by $800 every year. You have now a machine of
type A which is one year old. Should you replace it
with B and if so, when?
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Solution
Machine A
Machine A costs $9,000
operating costs are $200 for the first year,
and G=+ $2,000 every year , S=0 N=?
n S C-S MC Cumulative TC AC
MC
1 0 9,000 200 200 9200 9200
2 0 9,000 2200 2400 11400 5700
3 0 9,000 4200 6600 15600 5200
4 0 9,000 6200 12800 21800 5450
5 0 9,000 8200 21000 30000 6000

Machine A should be replaced after 3 years 19

Solution
Machine B
Machine B costs $10,000; operating costs are $400
for the first year and G=+ $800 every year.
n S C-S MC CMC TC AC
1 0 10,000 400 400 10400 10400
2 0 10,000 1200 1600 11600 5800
3 0 10,000 2000 3600 13600 4533.33
4 0 10,000 2800 6400 16400 4100
5 0 10,000 3600 10000 20000 4000
6 0 10,000 4400 14400 24400 4066.67
Machine B should be replaced after 5 years
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Solution
As the cost of running machine A in the third
year ($5200) is more than the average
yearly cost for machine B($4000)

machine A should be replaced at the end of

two years. Since machine A is one year
old, it should be run for one year more and
then it should be replaced.

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1- Report on Types of Costs
Fixed Costs & Variable Costs
Recurring & Non-recurring Costs
Direct and Indirect Costs
Cash Costs & Book Costs
Sunk Costs & Opportunity Costs
Marginal Costs & Average Costs
Incremental Costs
Life-Cycle Costs

2- Report about the methods for

depreciation which you known 22
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