1. Replacement Analysis
Presented By:- MallikarjunVastrad FP17003
National Institute of Construction Management & Research
(NICMAR),Pune 2017-19
2. Replacement Analysis
▪ A tool with which equipment owners time the equipment replacement
decision.
▪ The cost of owning the present equipment is compared with the cost of
owning potential alternatives for replacing it.
▪ Theoretical and Practical methods are used to accomplish this
important equipment task.
3. Theoretical Method
▪ Dr. James Douglas, professor emeritus at Stanford University, in his
book “ Construction Equipment Policy” proposed four different
theoretical approaches to establish an equipment replacement policy
based on a rigorous and rational analysis of cost, time and production.
▪ The methods include Intuitive method, the Minimum Cost Method,
Maximum Profit Method, and the Mathematical Modeling Method
▪ Each method can be applied to a different type of equipment owner
4. ▪ I) Intuitive Method:-
– Acts as a baseline against which other methods can be compared
– Simply the application of common sense to decision making
▪ II) Minimum Cost Method:-
– Fits very nicely into a public construction agency’s equipment management policy as the
focus on replacing equipment at a point in time where the overall cost of operating and
maintaining a given piece of equipment is minimized and hence the strain on tax payer is
also reduced
▪ III) Maximum Profit Method:-
– Furnishes a model for construction contractors and other entities that utilize their
equipment in a profit making enterprise to make the replacement decision with an eye on
their bottom line
▪ IV) Mathematical Modeling:-
– Rigorous analytical approach for those who utilize computer based simulations to assist in
optimizing equipment fleet size and composition for large equipment intensive projects.
6. I) Intuitive Method
▪ Most prevalent one for making replacement decisions due to its simplicity and reliance on
individual judgment.
▪ Mainly depends on professional judgment or an apparent feeling of correctness to make
replacement decisions.
▪ Equipment is often replaced when it requires a major overhaul or at times at the beginning of
new equipment-intensive job.
▪ Availability of capital is often a decisive factor
▪ Considering the example, there is no rational answer for the economic life of both types of
trucks
▪ Retaining the current trucks seems better option as they are only one year old, and earn
revenue almost at some rate
▪ Also the potential reduction in maintenance cost does not seem to be particularly dramatic, the
owner can choose to keep using current trucks
▪ In this case, it is clearly seen that long-term maintenance and operating cost is overlooked by
“professional judgement”
7. II) Maximum Profit Method
▪ Based on maximizing equipment profit
▪ To be used by the organizations that are able to generate revenue and
hence, profit
▪ Works best when the profit associated with the given equipment is
isolated and clearly defined
▪ However, it is not easy to separate annual equipment profit from entire
project or equipment fleet profit, in such cases the minimum cost
method should be used.
▪ Tables 3.11 and 3.12 illustrates how to determine the economic life of
the two alternatives using profit as the metric to make replacement
decision
8.
9. ▪ The economic life of the equipment is the year in which the average annual
cumulative profit is maximized.
▪ This results in higher profits over long period of time
▪ In table 3.11, the economic life of current trucks is at the end of fifth year because
the average annual cumulative profit is maximized in that year by $20,511
▪ The maximum average annual cumulative profit of $24,486 is in the fourth year
for the proposed truck in table 3.2
▪ The proposed truck should be replace the current trucks
▪ Major issue in this method is to identify the proper timing of replacement
▪ This occurs when the estimated annual profits of the current equipment for the
next year falls below the average annual cumulative profit of proposed
replacement
▪ Here, the annual profit of current trucks never exceeds $24,486, so they should be
replaced immediately.