Chapter 9_Replacement_Analysis

Chapter 9_Replacement_Analysis - Replacement Analysis...

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1 Replacement Analysis – Chapter 9
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2 Replacement Analysis Should an asset be Abandoned? Augmented / Upgraded? Replaced? Terminology Defender - the existing (old) asset Challenger - the new asset
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3 Abandonment Retirement without replacement Keep the asset if the present worth of the cash flows for the remaining life is positive, otherwise retire it
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4 Major Reasons for Upgrading or Replacement Physical Impairment (Deterioration) - affecting safety, capacity, quality, etc. Altered Requirements – demand increases or decreases Technology Advancements - no longer economical because newer assets have lower operating costs or higher capacities Financing Changes - lease vs. buy
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5 Types of Lives for Typical Assets Economic Life - period of time that results in the minimum Equivalent Uniform Annual Cost (EUAC)* of owning and operating an asset Ownership Life - period between the date of acquisition and the date of disposal by a specific owner Physical Life - period between original acquisition and final disposal over its succession of owners Useful Life - period of time that an asset is kept in productive service *Note that the EUAC is the same as an AW of a primarily cost (negative) cash flow pattern.
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6 Assumptions and Considerations Past estimation errors Sunk costs Investment value of existing assets from the outsider viewpoint Income taxes Economic life of the challenger Economic life of the defender
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7 Complexities Useful lives of the best challenger and the defender are known, or can estimated, but are not the same. Repeatability Assumption
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Chapter 9_Replacement_Analysis - Replacement Analysis...

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