Replacement can be defined as the decision problems involving the replacement of existing obsolete or worn out assets.

1. WEL COME
TO
OUR
PRESENTATION

2. Course Title
ENGINEERING ECONOMICS
Course Code
Hum - 285

3. Sultan
al
Shafian
Lecturer
Civil Department
SONARGAON UNIVERSITY
Our Course Teacher

4. Our Presentation topic
⬗ “Replacement analySiS: impoRtance and
application”

5. Replacement
Causes of replacement :
1. Deterioration
2. Obsolescence
3. Inadequacy
4. Working conditions
• Replacement can be defined as the
decision problems involving the replacement
of existing obsolete or worn out assets.

6. 
TYPES OF REPLACEMENT PROBLEM
• Replacement of assets with deteriorate with
time:
• Economic life of an asset.
• Replacement of an existing asset with
a new asset.
• Simple probabilistic model for assets which
fail completely.(replacement due to sudden
failure)

7. REASONS FOR REPLACEMENTREASONS FOR REPLACEMENT
ANALYSiSANALYSiS

8. PHYSiCAL iMPAiRMENTPHYSiCAL iMPAiRMENT
 Efficiency loss resulting from continued use – again.
 Increased routine and corrective maintenance costs.
 Greater energy requirements.
 Increased need for operator intervention.
 Unanticipated problems leading to equipment deterioration.

9. ALTERED REQUiREMENTS
 Significant change in demand for related products or
services.
 Significant change in the composition or design of
associated products or services.
 May be considered a from of obsolescence.

10. TECHNOLOGY
 Impact of technological change varies with associated
industry.
 Technological changes typically reduce cost per unit and
improve quality of output.
 Results in earlier replacement of existing assets with
improved asset.
 May be considered a form of obsolescence.

11. FINANCINGFINANCING
 Considers economic opportunity changes external to
the physical operation or use of the asset.
 May involve income tax considerations( depreciation
and after- tax analysis)
 May be considered a form of obsolescence.

12. ECONOMIC LIFE
 The period of time (years) that results in the minimum
Equivalent Uniform Annual Cost (EUAC) of owning and
operating an asset
 EUAC is a term sometimes used to identify the annual worth of a
primarily cost cash flow pattern.
 Assuming good asset management, economic life
should coincide with time from date of acquisition to date of
abandonment, demotion in use, or replacement from primary
intended service.

13. OWNERSHIP LIFE
 Period between date of acquisition and
date of disposal by a specific owner.
 A given asset may have different
categories of use during this period

14. PHYSICAL LIFE
 Period of time between original
acquisition and final disposal of
an asset over its succession of
owners.

15. USEFUL LIFE
 The time period in years that an asset is kept
in productive service either in primary or
backup mode.
 An estimate of how long an asset is
expected to be used in a trade or business to
produce income.

16. ECONOMIC LIFE OF THE
CHALLENGER
 Economic life of an asset minimizes equivalent uniform
annual cost of owning and operating an asset.
 Economic life is often shorter than useful or physical life.
 Economic data regarding challengers are periodically
(often annually) updated.
 Replacement studies then repeated to ensure most up-
to-date evaluation.

17. ECONOMIC LIFE OF DEFENDER
 Often one year.
 Because different lives are involved, care should be
taken when comparing defender with challenger.
 Defender should be kept longer than apparent
economic life as long as its marginal cost < minimum
equivalent uniform annual cost of challenger over its
economic life.

18. PROJECT RETIREMENT WITHOUT
REPLACEMENT -- ABANDONMENT
Two assumptions apply:
 Once capital investment made, firm desires to
postpone project abandonment as long as its present
equivalent value (PW) is not decreasing.
 The project will be terminated at the best
abandonment time and will not be replaced by the firm.

19. Thanks!
Any questions?