Problem-03:

(a) A machine owner finds from his past records that the cost per year of maintaining a
machine A whose purchase price is Tk. 6,000 is as given below:
Year
Maintenance Costs
(Tk.)
Resale Value (Tk.)

1,000

1,200

1,400

1,800

2,300

2,800

3,400

4,000

3,000

1,500

750

375

200

200

200

200

At what age is a replace due?

(b) The machine owner of the previous part (a) has another machine B whose capacity is
50% more than machine A is Tk. 8,000. The estimated maintaining cost and resale value for
this machine is given below:
Year
Maintenance Costs
(Tk.)
Resale Value (Tk.)

1,200

1,500

1,800

2,400

3,100

4,000

5,000

6,100

4,000

2,000

1,000

500

300

300

300

300

What should be replacement policy among two machines?

Solution-03:
Table: Determination of Optimum Replacement Period for Machine A
Year

Resale
Value
(Tk)

1
2
3
4
5
6
7
8

3,000
1,500
750
375
200
200
200
200

Annual
Cumulative
Depreciation Maintenance Maintenance
Cost (Tk.)
Cost (Tk.)
3={6,0004
5
(2)}
3,000
1,000
1,000
4,500
1,200
2,200
5,250
1,400
3,600
5,625
1,800
5,400
5,800
2,300
7,700
5,800
2,800
10,500
5,800
3,400
13,900
5,800
4,000
17,900

Total
Cost
(Tk.)
6= (3+5)
4,000
6,700
8,850
11,025
13,500
16,300
19,700
23,700

Average
Cost (Tk.)
7= 6/no.
of years
4,000
3,350
2,950
2,756
2,700*
2,717
2,814
2,963

From the above table we find that average cost (Tk. 2,700) is lowest at the end of the
5th year or beginning of the 6th year, compared to maintenance cost. So the machine-A
should be replaced at the end of 5th year.

Table: Determination of Optimum Replacement Period for Machine B

Year

Resale
Value
(Tk)

1
2
3
4
5
6
7
8

4,000
2,000
1,000
500
300
300
300
300

Annual
Cumulative
Depreciation Maintenance Maintenance
Cost (Tk.)
Cost (Tk.)
3={8,0004
5
(2)}
4,000
1,200
1,200
6,000
1,500
2,700
7,000
1,800
4,500
7,500
2,400
6,900
7,700
3,100
10,000
7,700
4,000
14,000
7,700
5,000
19,000
7,700
6,100
25,100

Total
Cost
(Tk.)
6= (3+5)
5,200
8,700
11,500
14,400
17,700
21,700
26,700
32,800

Average
Cost (Tk.)
7= 6/no.
of years
5,200
4,350
3,833
3,600
3,540*
3,617
3,814
4,100

From the above table we find that average cost (Tk. 3,540) is lowest at the end of the
5th year or beginning of the 6th year, compared to maintenance cost. As per given
information it reveals that machine B has 50% more capacity than machine A.
Therefore, 2 larger machines B are equivalent to 3 smaller machines A. The average
yearly cost of machine B is Tk. 3,540 which is equivalent to TK. 2,360 (2 x 3540/3)
of 1 smaller machine A. Since, this is less than Tk. 2,700, the lowest average cost of 1
smaller machine A. Therefore, the smaller machine A should be replaced by the larger
machine B.
Problem-04:
Machine A cost Tk. 9,000, annual operating cost are Tk. 200 for the 1 st year and then
increased by Tk. 2,000 every year. Determine the best age at which to replace the machine if
the optimum replacement policy is followed? What will be the average yearly cost of owing
and operating the machine assumes that the machine has no resale value.
Machine B cost Tk. 10,000 annual operating costs are Tk. 400 for the 1 st year and then
increased by Tk. 800 every year and have no resale value. You have now a machine of Type A
which is one year old. Should you replace it with machine B?

Solution-04:
Table: Determination of Optimum Replacement Period for Machine A
Year

Resale
Value
(Tk)

1
2
3
4
5
6
7
8

0
0
0
0
0
0
0
0

Annual
Cumulative
Depreciation Maintenance Maintenance
Cost (Tk.)
Cost (Tk.)
3={9,0004
5
(2)}
9,000
200
200
9,000
2,200
2,400
9,000
4,200
6,600
9,000
6,200
12,800
9,000
8,200
21,000
9,000
10,200
31,200
9,000
12,200
43,400
9,000
14,200
57,600

Total
Cost
(Tk.)

Average
Cost (Tk.)
7= 6/no.
of years
9,200
5,700
5,200*
5,450
6,000
6,700
7,486
8,325

6= (3+5)
9,200
11,400
15,600
21,800
30,000
40,200
52,400
66,000

From the above table we find that average cost (Tk. 5,200) is lowest at the end of the
3rd year or beginning of the 4 th year, compared to maintenance cost. So the machine-A
should be replaced at the end of 3rd year.
Table: Determination of Optimum Replacement Period for Machine B
Year

Resale
Value
(Tk)

1
2
3
4
5
6
7
8

0
0
0
0
0
0
0
0

Annual
Cumulative
Depreciation Maintenance Maintenance
Cost (Tk.)
Cost (Tk.)
3={10,0004
5
(2)}
10000
400
400
10000
1200
1600
10000
2000
3600
10000
2800
6400
10000
3600
10000
10000
4400
14400
10000
5200
19600
10000
6000
25600

Total
Cost
(Tk.)
6= (3+5)
10400
11600
13600
16400
20000
24400
29600
35600

Average
Cost (Tk.)
7= 6/no.
of years
10400
5800
4533
4100
4000*
4067
4229
4450

From the above table we find that average cost (Tk. 4000) of machine B is lowest at
the end of the 5th year or beginning of the 6th year, compared to maintenance cost. So
the machine-B should be replaced at the end of 5th year.
From the above calculation it is found that lowest average cost Tk. 4,000 for machine
B is less than the lowest average cost of Tk. 5,200 for machine A. So, the machine A
should be replaced by machine B.