Module26 - Post Implementation Analysis Replacement...

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Post Implementation Analysis Replacement Analysis Part I
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Key Concepts Last Module: Examined the abandonment decision. This Module: Consider when to replace assets. You may want to keep a project going, but at cheaper cost…
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Replacement Analysis Asset Replacement: Retire a current asset. Acquire another asset to take its place. Two Decisions: When to make the replacement. Which asset to acquire.
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Why Replace Assets? Deterioration Asset ( defender ) degrades with use. Decreasing Salvage Value. Increasing Operating Costs. Obsolescence and Technological Change Newer assets available on the market. ( challengers ) are generally more efficient than current assets in use. Newer assets tend to have higher capital costs. Offset by lower operating costs.
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Traditional Replacement Analysis Similar to our work with analyzing service projects with unequal lives. Predict cash flows of current asset (defender) and possible replacement (challenger) over desired time frame. Use unequal lives analysis to determine better asset.
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Example Monroe-Woodbury School District is purchasing five new school buses at the cost of $125,000 each. These buses, able to hold 61 passengers, are to replace older buses that have been in service since 2000. "Photo News - Replacing 10 School Buses - Straus Newspapers." Straus News, Your Community News Source . 6 May 2010. <http://www.strausnews.com/articles/2010/05/10/photo_news/news/2.txt>.
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Traditional Solution If we require the bus to be in service indefinitely (infinite horizon), then we would assume repeatability and choose the lower AEC solution. If we require the bus over a finite horizon (say 10 years), then we estimate the salvage value to sell the new bus early and compare with the costs to extend the life of the old bus.
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What’s Wrong with this Analysis? It is assumed that the buses should be retained for their useful lives. The replacement decision only occurs at time 0. Regardless of solution, the keep/replace decision is fixed until the end of the horizon. Solution does not consider other possible buses available on the market over the horizon. The infinite horizon solution assumes repeatability -- which is unrealistic for the old bus.
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More Realistic Replacement Assumptions May replace asset at any time -- at each decision period -- over the horizon. Asset should not automatically be retained for its useful life -- rather, its economic life . Different challengers may be available each time period. Decision horizons may be finite or infinite - continue operation indefinitely.
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Analyses Infinite horizon, no technological change.
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Module26 - Post Implementation Analysis Replacement...

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