Hi guys in this page I will show you the replacement analysis practice started by estimating Defender’s remaining useful life:
An-11-years old facility can be sold now up to $2000. The salvage value is 10% from initial value and remain the same for following years. Operational&maintenance cost is $500 per annum and increase $100 per year for upcoming period. Calculate economic service life if the interest rate is 10%!
form previos page, the remaing useful life can be obtained by computing the EUAC.
Total EUAC = EUAC capital + EUAC O&M (operational cost)
Now let try so many time to be analyzed, because we do know exactly the period which has minimum EUAC. However since the facility have been using for 11 years, we are going to restart again by period 1.
EUAC capital in this practice is salvage value and will be the same every year which is 10% from initial value ($2000) is $200. however in M&C they gradually decrease and has the arithmetic pattern. To find the annual equivalence, we have to convert it by using arithmetic gradient formula. Now lets take a look at this table
Just like I already mention to you that we dont know when the minimum EUAC will occur. Let say we apply 5 years analysis. To compute Maintenance cost which has arithmetic pattern, all the casflow will be multiplied by 100 (A/G, 10%, n). So it is better you learn again arithmatic equivalent because the step is lil bit complicated. The “n” will be changed by the number of years started by “1” instead of using the actual years (11 years usage). Just continue until year-5. The EUAC has already annual equivalence and has constant number every year according to the practice. To find out the total EUAC just add the EUAC capital with EUAC maintenance cost. The lowest EUAC can found at year 1. The EUAC value has not change yet for several years so we can say that after 1 year usage the machine should be replaced.
Economic service life for Challenger
Replacement analysis will talk much on determining Defender’s remaining useful life and Economic service life for Challenger. Now lets practice how to estimate Economic service life for Challenger.
A machine with $ 10,000 has no residual value. Maintenance and operational cost in the first year are being covered by the company. The following years, the cost are spending gradiently for $600. If the interest rate is 8%, Find economic service life (earning minimum EUAC) for this machine?
To solve this case, you can apply the same step like the Defender’s remaining useful life does. The smallest EUAC value indicate the economic service life for challenger. The capital cost will change every years to this case so you have to convert it annually (present to annual) by using annual worth factor A/P, 8%,n. The little “n” will be changed by the number of year. Maintenance cost also change constantly started by $600. Then convert again to annual by using A/G, 8%, n. Don’t forget that the first maintenance cost will be freely charged so just compute the next following years
the minimum EUAC is located at year 6 so we can assume the Economic service life for Challenger and it means after 6 year usage the asset will spend much on maintenance cost. It’s too risky to use aging asset.
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