Mass production has been found to be the most economical method

of satisfying human wants. However, mass production necessitates the

employment of large quantities of producer goods which become consumed,
inadequate, obsolete, or in same way become candidates for replacement.
Decisions concerning the replacement of an asset would be simple if the
future could correctly predicted. If such were the case, the choice between
an existing asset and challenger would be based upon the differences in
future receipts and disbursements as indicated by analysis that is directed
toward reducing the differences to an equivalent basis for comparison.
Unfortunately, there is no general rule that will yield accurate information
about the future. Each situation must, therefore, be evaluated in the light of
experience, knowledge, and judgment available at the time a decision is to
be made.
It is not surprising to find many engineers actively engaged in
replacement analysis. By virtue of their training, experience, familiarity,
with equipment, and objectivity, engineers are particularly well qualified to
make recommendations concerning the replacement of physical assets.
Engineers not directly engaged in replacement analysis will be interested in
the methods employed since physical assets are an essential element in the
process of want satisfaction.

12.1 REPLACEMENT SHOULD BE BASE UPON ECONOMY

When the success of an economic venture is dependent upon profit,
replacement should be based upon the economy of future operation.
Although production facilities are, and should be, considered as a means to
an end; that is, production at lowest cost, there is ample evidence that
motives other that economy often enter into analysis concerned with the
replacement of assets.
The idea that replacement should occur when it is most economical
rather than when the asset is worn out is contrary to the fundamental concept
of thrift possessed by many people. In addition, existing assets are often
venerated as old friends. People tend to derive a measure of security from
familiar old equipment and to be skeptical to change, even though they may
profess a progressive outlook. Replacement of equipment requires a shift of
enthusiasm. When a personal initiates a proposal for new equipment, be
must ordinarily generated considerable enthusiasm to overcome inertia
standing in the way of its acceptance. Later, enthusiasm may have to be
transferred to a replacement. This is difficult to do, particularly if one must
confess to having been overenthusiastic about the equipment originally
proposed.
Part of reluctance to replace physically satisfactory but
economically inferior units of equipment has roots in the fact that the import
of a decision to replace is much greater than that of a decision to continue
with the old. A decision to replace is a commitment for the life of the
replacing equipment. But a decisions to continue with the old usually only
a deferment of a decisions to replace that may be reviewed at any time when
the situation seems clearer. Also a decisions to continue with old equipment
that result in less censure than a decisions to replace it with new equipment
that results in an equal loss.
The economy of scrapping a functionally efficient unit of productive
equipment lies in the conservation of effort, energy, material, and time
resulting from its replacement. The unused remaining utility of an old unit
is sacrificed in favor of saving in prospect with a replacement. Consider, by
way of illustration, a shingle roof. Event a roof that has many leaks will have
some utility as a protection against the weather and may have many sound
shingles in it. The remaining utility could be made use of by continual
repair. But the excess of labor and materials required to make a series of
small repairs over the labor and materials required for a complete
replacement may exceed the utility remaining in the roof. If so, labor and
materials can be conserved by a decisions to replace the roof.