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Title: Engineering Economy
Description: Download it now! It is a lecture and notes that is all about Replacement Analysis....
Description: Download it now! It is a lecture and notes that is all about Replacement Analysis....
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Engineering Economy
Chapter 9: Replacement Analysis
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Three reasons to consider a
change
...
The second and third reasons are sometimes
referred to as different categories of obsolescence
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Some important terms for
replacement analysis
• Economic life: the period of time (years) that
yields the minimum equivalent uniform annual
cost (EUAC) of owning and operating as asset
...
• Physical life: period between original acquisition
and final disposal over the entire life of an asset
...
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
• The only exception to the above is if there
are income tax implications forthcoming
that were not foreseen
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Replacement: watch out for the
sunk-cost trap
• Only present and future cash flows are
considered in replacement studies
...
• Sunk costs—used here as the difference
between an asset’s BV and MV at a
particular point in time—have no relevance
except to the extent they affect income
taxes
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Replacement: the outsider viewpoint
• The outsider viewpoint is the perspective taken by
an impartial third party to establish the fair MV of
the defender
...
• The opportunity cost is the opportunity foregone
by deciding to keep an asset
...
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
• The economic life of the defender is often one
year, so a proper analysis may be between
different-lived alternatives
...
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
• Studies must be made on an after-tax basis
for an accurate economic analysis since this
can have a considerable effect on the
resulting decision
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Before-tax PW example
Acme owns a CNC machine that it is considering
replacing
...
Operating and maintenance
expenses are $50,000 per year
Acme can purchase a new CNC machine, with the same
functionality as the current machine, for $90,000
...
Annual operating and maintenance costs will
be $35,000 per year
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Example solution
Defender
Challenger
PW of the challenger is greater than PW of the defender
(but it is close)
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Proper analysis requires knowing the
economic life (minimum EUAC) of the
alternatives
...
• The difficulties in estimating these values
are encountered in most engineering
economy studies, and can be overcome in
most cases
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Finding the EUAC of the challenger
requires finding the total marginal cost
of the challenger, for each year
...
This equation represents the present worth, through year k,
of total costs
...
Eq
...
)
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
This can be simplified to (eq
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Finding the economic life of the new
CNC machine
...
on capital
TC
Year 1
$35,000
$15,000
$13,500
$63,500
Year 2 Year 3 Year 4
$35,000 $35,000 $35,000
$15,000 $10,000 $5,000
$11,250 $9,000 $7,500
$61,250 $54,000 $47,500
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
Initial investment is
$18,000
...
The salvage value is $0 at all times
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
The economic life of the defender
• If a major overhaul is needed, the life
yielding the minimum EUAC is likely the
time to the next major overhaul
...
• The defender should be kept as long as its
marginal cost is less than the minimum
EUAC of the best challenger
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Finding the economic life of the
defender CNC machine
...
on capital
$3,750
$2,250
$1,500
$750
TC
$63,750 $57,250 $56,500 $55,750
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
• In general, if a defender is kept beyond where the TC
exceeds the minimum EUAC for the challenger, the
replacement becomes more urgent
...
• When the defender and challenger have different useful
lives, often the analysis is really to determine if now is the
time to replace the defender
...
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
• For projects having positive net cash flows
(following an initial investment) and a finite
period of required service
...
• Abandon the year PW is a maximum
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Abandonment example
A machine lathe has a current market value of
$60,000 and can be kept in service for 4 more
years
...
Year 1
Year 2
Year 3
Year 4
Net receipts
$50,000 $40,000 $15,000 $10,000
Market value
$35,000 $20,000 $15,000
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
Sullivan, Elin M
...
Patrick Koelling
Keep for four years
Copyright ©2012 by Pearson Education, Inc
...
Taxes can affect replacement decisions
...
• Taxes must be considered not only for each
year of operation of an asset, but also in
relation to the sale of an asset
...
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
The economic life of an asset becomes, after taxes, (eq
...
The total marginal cost, for
each year, is (eq
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
We must also consider the possible tax
effects of the sale of the defender
...
The net ATCF, if the defender is kept, after
taxes, is
Engineering Economy, Fifteenth Edition
By William G
...
Wicks, and C
...
Upper Saddle River, New Jersey 07458
All rights reserved
...
Depreciation deductions have followed the
MACRS (GDS, 3-year recovery period) method
...
Assuming an
effective income tax rate of 35% compute the after-tax
investment value of the bending machine if it is kept
...
Sullivan, Elin M
...
Patrick Koelling
Copyright ©2012 by Pearson Education, Inc
...
Title: Engineering Economy
Description: Download it now! It is a lecture and notes that is all about Replacement Analysis....
Description: Download it now! It is a lecture and notes that is all about Replacement Analysis....