VERONIQUE JOSEPH (20147) PE

ASSIGNMENT #4 REPLACEMENT ANALYSIS

1. Discuss FOUR (4) major reasons for replacement of production assets in the oil and gas
industry.
- Changing technology
- Under performance
- Changed requirements
- Management decisions

2. The annual operating expenses of an old boiler are $70,000 per year. The boiler can be used
for 5 years more. At the end of the fifth year it will have no salvage value. The present MV is
$30,000 if it were to be sold now.
A new boiler costs $120,000. Its operating expenses are estimated at $40,000 per year. It will
have a salvage value of $30,000 at the end of the fifth year.
Assess whether the old pressure vessel should be replaced or retain. Use MARR of 10% per
year. Show your calculation.

Defender (Old boiler) Challenger (New boiler)

P (MV) $30,000 P $120,000
A (AOE) $70,000 A $40,000
SV - SV $30,000
n 5 n 5

𝑃𝑊𝐷 = −30,000 − 70,000(𝑃/𝐴, 10%, 5)

𝑃𝑊𝐷 = −30,000 − 70,000(3.7908)
𝑃𝑊𝐷 = −295,356

𝑃𝑊𝐶 = −120,000 − 40,000(𝑃/𝐴, 10%, 5) + 30,000(𝑃/𝐹, 10%, 5)

𝑃𝑊𝐶 = −120,000 − 40,000(3.7908) + 30,000(0.6209)
𝑷𝑾𝑪 = −𝟐𝟓𝟑, 𝟎𝟎𝟓

The PW of the defender is more negative. Thus, the old pressure vessel should be replaced with
the challenger, new boiler. Choose the challenger.
VERONIQUE JOSEPH (20147) PE

3. A new unit of machine has a first cost of $200,000 and is expected to have a service life of 6
years.
The annual operating costs (AOC) are estimated at $50,000 for the first year of use and will
probably increase at $5,000 per year thereafter. The projected estimates of the salvage values
are as follows:

Determine the economic service life (ESL) of the machine. Use MARR of 10% per year. Show
your calculation.

𝑇𝑜𝑡𝑎𝑙 𝐴𝑊1 = −200,000(𝐴/𝑃, 10%, 1) + 160,000(𝐴/𝐹, 10%, 1)

− 50,000(𝑃/𝐹, 10%, 1)(𝐴/𝑃, 10%, 1)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊1 = −200,000(1.1) + 160,000(1.0) − 50,000(0.9091)(1.1)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊1 = −$110000.5

𝑇𝑜𝑡𝑎𝑙 𝐴𝑊2 = −200,000(𝐴/𝑃, 10%, 2) + 120,000(𝐴/𝐹, 10%, 2) − [ 50,000(𝑃/𝐹, 10%, 1)

+ 55,000(𝑃/𝐹, 10%, 2)](𝐴/𝑃, 10%, 2)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊2 = −200,000(0.5762) + 120,000(0.4762) − [ 50,000(0.9091)
+ 55,000(0.8264)](0.5762)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊2 = −$110476.61
VERONIQUE JOSEPH (20147) PE

𝑇𝑜𝑡𝑎𝑙 𝐴𝑊3 = −200,000(𝐴/𝑃, 10%, 3) + 75,000(𝐴/𝐹, 10%, 3) − [ 50,000(𝑃/𝐹, 10%, 1)

+ 55,000(𝑃/𝐹, 10%, 2) + 60,000(𝑃/𝐹, 10%, 3)](𝐴/𝑃, 10%, 3)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊3 = −200,000(0.4021) + 75,000(0.3021) − [ 50,000(0.9091) + 55,000(0.8264)
+ 60,000(0.7513)](0.4021)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊3 = −$112442.07

𝑇𝑜𝑡𝑎𝑙 𝐴𝑊4 = −200,000(𝐴/𝑃, 10%, 4) + 30,000(𝐴/𝐹, 10%, 4) − [ 50,000(𝑃/𝐹, 10%, 1)

+ 55,000(𝑃/𝐹, 10%, 2) + 60,000(𝑃/𝐹, 10%, 3)
− 65,000(𝑃/𝐹, 10%, 4)](𝐴/𝑃, 10%, 4)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊4 = −200,000(0.3155) + 30,000(0.2155) − [ 50,000(0.9091) + 55,000(0.8264)
+ 60,000(0.7513) + 65,000(0.6830)](0.3155)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊4 = −$113544.89

𝑇𝑜𝑡𝑎𝑙 𝐴𝑊5 = −200,000(𝐴/𝑃, 10%, 5) + 15,000(𝐴/𝐹, 10%, 5) − [ 50,000(𝑃/𝐹, 10%, 1)

+ 55,000(𝑃/𝐹, 10%, 2) + 60,000(𝑃/𝐹, 10%, 3) − 65,000(𝑃/𝐹, 10%, 4)
− 70,000(𝑃/𝐹, 10%, 5)](𝐴/𝑃, 10%, 5)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊5 = −200,000(0.2638) + 15,000(0.1638) − [ 50,000(0.9091) + 55,000(0.8264)
+ 60,000(0.7513) + 65,000(0.6830) + 70,000(0.6209)](0.2638)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊5 = −$109352.78

𝑇𝑜𝑡𝑎𝑙 𝐴𝑊6 = −200,000(𝐴/𝑃, 10%, 6) + 10,000(𝐴/𝐹, 10%, 6) − [ 50,000(𝑃/𝐹, 10%, 1)

+ 55,000(𝑃/𝐹, 10%, 2) + 60,000(𝑃/𝐹, 10%, 3) − 65,000(𝑃/𝐹, 10%, 4)
− 70,000(𝑃/𝐹, 10%, 5) − 75,000(𝑃/𝐹, 10%, 6)](𝐴/𝑃, 10%, 6)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊6 = −200,000(0.2296) + 10,000(0.1296) − [ 50,000(0.9091) + 55,000(0.8264)
+ 60,000(0.7513) + 65,000(0.6830) + 70,000(0.6209) + 75,000(0.5645)](0.2296)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊6 = −$105739.04

Economic service life (ESL) of the machine of defender is at n = 6 .