This document discusses replacement theory and models for determining optimal replacement policies. It introduces replacement theory and explains that items must be replaced when they become obsolete, unusable due to failure, or inefficient due to deterioration over time. It presents four models of replacement: (1) aging of machines that deteriorate over time, (2) availability of new machines that are better, (3) considering the time value of money in depreciation calculations, and (4) group replacements of items that completely fail after a certain usage amount. An example of replacing light bulbs individually or through group replacement is also provided.

1. Made By -: Sumit Pachauri
Karishma Singh
University -: Mangalayatan
University, Aligarh.
Course -: M.B.A. IInd Semester
Replacement
Theory

2. Content
 Introduction
 Sudden Failure
 Regular Failure
 Depreciation Cost
 Why is Replacement is required?

3. Introduction
 Replacement Theory is Concerned with the
Prediction of Replacement Costs and
determinations of the most economic
replacement Policy.
 The Problems of replacement are encountered in
case both Men & Machines.
 The Replacement Theory is an equally Important
aspect of O.R. In case of Items who efficiency go
on decreasing according to their AGE, we have to
SPEND MORE MONEY on account of increased
operating cost, increased REPAIR COST, etc.
 In Such Cases the replacement of an old item
with a new One is the only alternative to prevent
such increased Expenses.

4. Why Replacement is
Required?
 Due to New developments the Current
equipments has become technologically obsolete.
 The Current Equipment has become unusable i.e.
it has failed and does not Work at all. For Ex –
The Electric Light bulb has failed and as such
must be replaced. This is a case of Sudden
Failure.
 The Current Equipments has deteriorated on
account of its long use over time and as such
does not function efficiently. In other words it
requires expensive maintenance. This is called
regular failure.

5. Model-I: Aging of Machines
 Items that deteriorate with time e.g.
machine tools,
vehicles, equipment buildings .

7. Model-II: Availability of Similar New
Machines with Better Usages
 Items becoming out-of-date due to new
developments like ordinary weaving looms by
automatic, manual accounting by tally,
computers, cars ...

8. Model-III: Time Value of Machines
Considered
-Depreciation of Money or Present Worth Factor
 Items which deteriorate with time
 The depreciation of money is considered
in calculations

9. Model-IV: Group Replacements
 Items which do not deteriorate but fail completely
after certain amount of use like electronic parts,
street lights...
 Illustration: An office has 1000 bulbs installed of which
20% bulbs keeps on failing each week. Individual Bulb
replacement costs Rs 3; while Group Replacement costs
Re 1 per bulb. It is decided to replace all the bulbs
simultaneously at fixed interval & also to replace the
individual bulbs that fail in between. Decide a suitable
replacement policy.