EngineeringEconomy.pptVIP

Copyright ?2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Engineering Economy Chapter 9: Replacement Analysis The objective of Chapter 9 is to address the question of whether a currently owned asset should be kept in service or immediately replaced. What to do with an existing asset? Keep it Abandon it (do not replace) Replace it, but keep it for backup purposes Augment the capacity of the asset Dispose of it, and replace it with another Three reasons to consider a change. Physical impairment (deterioration) Altered requirements New and improved technology is now available. The second and third reasons are sometimes referred to as different categories of obsolescence. 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. Ownership life: the period between acquisition and disposal by a specific owner. Physical life: period between original acquisition and final disposal over the entire life of an asset. Useful life: the time period an asset is kept in productive service (primary or backup). Replacement: past estimation errors Any study today is about the future—past estimation “errors” related to the defender are irrelevant. The only exception to the above is if there are income tax implications forthcoming that were not foreseen. Replacement: watch out for the sunk-cost trap Only present and future cash flows are considered in replacement studies. Past decisions are relevant only to the extent that they resulted in the current situation. 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. Replacement: the outsider viewpoint The outsider viewpoint is the perspective taken by an impartial