Lec%2035_Full - IE 343 Engineering Economics Lecture 35:...

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IE 343 Engineering Economics Lecture 35: Chapter 9 – Replacement Analysis Instructor: Tian Ni Nov.21, 2011 IE 343 Fall 2011 1
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Terminology IE 343 Fall 2011 2
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Defender : is the old asset that is being considered for replacement. Challenger : is the new asset that is considered for replacing the defender. IE 343 Fall 2011 Terminologies in Replacement Studies 3
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AW values : are used for both the defender and challenger. BV : Book value of an asset. MV : Market value of an asset. IE 343 Fall 2011 Terminologies in Replacement Studies 4
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Life Terminologies: Useful Life*: the length of time that we anticipate using the asset Ownership Life: Period between date of acquisition and date of disposal by a specific owner. Physical Life: Period between original acquisition and final disposal IE 343 Fall 2011 Terminologies in Replacement Studies 5
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Tax Life: the length of time that we can depreciate the asset. Economic Life*: the length of time during which keeping the asset is economically justifiable. The ESL establish the life n for the challenger and defender. IE 343 Fall 2011 Terminologies in Replacement Studies 6
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EUAC* : EUAC(Equivalent Uniform Annual Cost) is frequently used instead of AW values since often only the cost are used in the evaluation . IE 343 Fall 2011 Terminologies in Replacement Studies 7
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Outsider viewpoint: We use the so-called outsider viewpoint for approximating the investment worth of an exiting asset(defender). Outsider viewpoint is the perspective that would be taken by an impartial third party to establish the fair MV of a used(secondhand) asset. Present Realizable MV: Is the correct capital investment amount to be assigned to an existing asset in replacement studies Good way to reason is to use the opportunity cost or opportunity forgone principle IE 343 Fall 2011 Terminologies in Replacement Studies 8
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Before-Tax Replacement Analysis IE 343 Fall 2011 9
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A firm owns a pressure vessel that it is contemplating replacing. The old pressure vessel has annual operating and maintenance expenses of $60,000 per year and it can be kept for five more years, at which time it will have zero market value. It is believed that $30,000 could be obtained for the old pressure vessel if it were sold now. (Defender) IE 343 Fall 2011 Example 9.1-Before Tax Replacement Analysis 10
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A new pressure vessel can be purchased for $120,000. The new pressure vessel will have a market value of $50,000 in five years and will have annual operating and maintenance expenses of $30,000 per year. Using a (before-tax) MARR of 20% per year, determine whether or not the old pressure vessel should be replaced. A study period of five years is appropriate. (Challenger)
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This note was uploaded on 01/28/2012 for the course IE 343 taught by Professor Vincent,g during the Winter '08 term at Purdue University-West Lafayette.

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Lec%2035_Full - IE 343 Engineering Economics Lecture 35:...

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