This document discusses methods for replacement analysis of equipment. It describes four theoretical methods for determining the optimal time to replace equipment: intuitive method, minimum cost method, maximum profit method, and mathematical modeling method. These methods compare the costs of owning the current equipment to potential replacement options. The maximum profit method is examined in more detail, using an example to calculate the economic life when average annual cumulative profit is maximized. For the example trucks, the maximum profit method determines the proposed replacement truck should replace the current trucks immediately since its annual profit never exceeds that of the proposed truck.

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.

5. Consider this example

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

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.

10. THANK YOU….