Ch13 - Ch 13 Replacement Analysis Objectives Recast an...

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Ch 13 Replacement Analysis Objectives • Recast an equipment reinvestment decision as a challenger versus defender analysis. • Use the replacement analysis decision map to select the appropriate economic analysis technique to apply • Calculate the minimum cost life if economic challengers
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Objectives (cont.) • Incorporate concepts such as repeatability assumption for replacement analysis and marginal cost data for the defender to select the appropriate economic analysis techniques • Perform replacement problems on an after-tax basis, utilizing the defender sign change procedure when appropriate Replacement Analysis • So far focus has been on selecting the best of new alternatives • More frequently engineers must decide between existing and new facilities or should existing equipment be retained or replaced? Defender is existing equipment, challenger is best available replacement equipment
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The Replacement Problem • Replacement of existing asset may be reasonable in various cases such as obsolescence, depletion and deterioration due to aging. In each of these cases, the ability of a previously implemented business asset to produce the desired output is challenged. It may be economical to replace the existing asset. • An economic evaluation of the existing defender and the challenger replacement is the domain of replacement analysis . Shall we replace the defender now or shall we keep it for one or more additional years? The Replacement Problem Replacement of an asset may be reasonable in cases such as: Obsolescence : Occurs when the technology of an asset is surpassed by newer and/or different technology Depletion : The gradual loss of market value that is being consumed or exhausted. Deterioration due to aging : The general condition of loss in value due to the aging process.
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The Replacement Problem • Aging equipment has greater risk of break- downs • Planned replacement can be scheduled to minimize time and cost of disruptions • Unplanned replacements can be costly or even catastrophic • A budget should include allocation of money for new capital expenditures, either new facilities or replacement and upgrading of existing facilities The Replacement Problem • Replacement analysis may give recommendation that certain equipment be replaced and that money for the replacement be included in the capital
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This note was uploaded on 12/07/2011 for the course ENGR 301 taught by Professor Gg during the Fall '11 term at Concordia Canada.

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Ch13 - Ch 13 Replacement Analysis Objectives Recast an...

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