Republic of The Philippines Nueva Vizcaya State University Bayombong, Nueva Vizcaya

Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY

Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: ENG ECON – 1STSEM-2020-2021
COLLEGE OF ENGINEEERING
DEGREE PROGRAM BSCE COURSE NO. ENG ECON

SPECIALIZATION SE/CEM/TE/WRE COURSE TITLE ENGINEERING ECONOMICS
YEAR LEVEL 2nd Year TIME FRAME WK NO. IM NO. 9
I. UNIT TITLE/CHAPTER TITLE

9. DECISION UNDER CERTAINTY
II. LESSON TITLE

9.3 Replacement Decisions
III. LESSON OVERVIEW

This chapter perform a replacement/retention study between an in-place asset,
process, or system and one that could replace it.
IV. DESIRED LEARNING OUTCOMES

At the end of the topic, the students should be able to:
• explain the fundamental approach and terminology of replacement analysis.
• determine the ESL that minimizes the total AW for estimated costs and salvage
value.
• perform a replacement/retention study between a defender and the best challenger
• address the question of whether a currently owned asset should be kept in service
or immediately replaced.
V. LESSON CONTENT
A. Introduction
A decision situation often encountered in business firms and government

organizations, as well as by individuals, is whether an existing asset should be retired
from use, continued in service, or replaced with a new asset. As the pressures of
worldwide competition continue to increase, requiring higher quality goods and
services, shorter response times, and other changes, this type of decision is occurring
more frequently. Thus, the replacement problem, as it is commonly called, requires
careful engineering economy studies to provide the information needed to make sound
decisions that improve the operating efficiency and the competitive position of an
enterprise.
Engineering economy studies of replacement situations are performed
using the same basic methods as other economic studies involving two or more
alternatives. Often the decision is whether to replace an existing (old) asset,
descriptively called the defender, with a new asset. The one or more alternative
replacement (new) assets are then called challengers.
B. Basics of Replacement Study

• Defender and challenger are the names for two mutually exclusive alternatives.
The defender is the currently installed asset, and the challenger is the potential
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replacement. A replacement study compares these two alternatives. The

challenger is the “best” challenger because it has been selected as the best one to
possibly replace the defender. (This is the same terminology used earlier for
incremental ROR and B/C analysis, but both alternatives were new).
• Market value is the current value of the installed asset if it were sold or traded on
the open market. Also called trade-in value, this estimate is obtained from
professional appraisers, resellers, or liquidators familiar with the industry. In
replacement analysis, the salvage value at the end of one year is used as the
market value at the beginning of the next year.
• AW values are used as the primary economic measure of comparison between
the defender and challenger. The term equivalent uniform annual cost (EUAC) may
be used in lieu of AW, because often only costs are included in the evaluation;
revenues generated by the defender or challenger are assumed to be equal. (Since
EUAC calculations are exactly the same as for AW, we use the term AW.) Salvage
or market value is an exception; it is a cash inflow and carries a plus sign.
• Economic service life (ESL) for an alternative is the number of years at which the
lowest AW of cost occurs. The equivalency calculations to determine ESL establish
the life n for the best challenger and the lowest cost life for the defender in a
replacement study. The next section explains how to find the ESL.
• Defender first cost is the initial investment amount P used for the defender. The
current market value (MV) is the correct estimate to use for P for the defender in a
replacement study. The estimated salvage value at the end of one year becomes
the market value at the beginning of the next year, provided the estimates remain
correct as the years pass. It is incorrect to use the following as MV for the defender
first cost: trade-in value that does not represent a fair market value, or the
depreciated book value taken from accounting records.
• Challenger first cost is the amount of capital that must be recovered (amortized)
when replacing a defender with a challenger. This amount is almost always equal
to P, the first cost of the challenger.
Sometimes, an analyst or manager will attempt to increase this first cost by an amount
equal to the unrecovered capital remaining in the defender, as shown on the accounting
records for the asset. This incorrect treatment of capital recovery is observed most often when
the defender is working well and in the early stages of its life, but technological obsolescence,
or some other reason, has forced consideration of a replacement. This leads us to identify
two additional characteristics of replacement analysis, in fact, of any economic analysis: sunk
costs and nonowner’s viewpoint.
• A sunk cost is a prior expenditure or loss of capital (money) that cannot be
recovered by a decision about the future. sunk costs should be handled in a realistic
way using tax laws and write-off allowances.
A sunk cost should never be added to the challenger’s first cost, because it will
make the challenger appear to be more costly than it actually is.
For example, assume an asset costing ₱100,000 two years ago has a
depreciated value of ₱80,000 on the corporate books. It must be replaced
prematurely due to rapidly advancing technology. If the replacement alternative
(challenger) has a first cost of ₱150,000, the ₱80,000 from the current asset is a
sunk cost were the challenger purchased.
For the purposes of an economic analysis, it is incorrect to increase the
challenger’s first cost to ₱230,000 or any number between this and ₱150,000.
• The nonowner’s viewpoint, also called the outsider’s viewpoint or consultant’s

viewpoint, provides the greatest objectivity in a replacement study. This viewpoint
performs the analysis without bias; it means the analyst owns neither the defender
nor the challenger. Additionally, it assumes the services provided by the defender
can be purchased now by making an “initial investment” equal to the market value
of the defender.
If the planning horizon is unlimited, that is, a study period is not specified, the
assumptions are as follows:
1. The services provided are needed for the indefinite future.
2. The challenger is the best challenger available now and, in the future, to replace
the defender. When this challenger replaces the defender (now or later), it will be
repeated for succeeding life cycles.
3. Cost estimates for every life cycle of the defender and challenger will be the
same as in their first cycle.
C. Reasons for Replacement Analysis

The need to evaluate the replacement, retirement, or augmentation of assets
results from changes in the economics of their use in an operating environment. Various
reasons can underlie these changes, and unfortunately, they are sometimes accompanied
by unpleasant financial facts. The following are the three major reasons that summarize
most of the factors involved:
1. Physical Impairment (Deterioration). These are changes that occur in the

physical condition of an asset. Normally, continued use (aging) results in the less
efficient operation of an asset. Routine maintenance and breakdown repair costs
increase, energy use may increase, more operator time may be required, and so
forth. Or, some unexpected incident such as an accident occurs that affects the
physical condition and the economics of ownership and use of the asset.
2. Altered Requirements Capital assets are used to produce goods and services
that satisfy human wants. When the demand for a good or service either increases
or decreases or the design of a good or service changes, the related asset(s) may
have the economics of its use affected.
3. Technology The impact of changes in technology varies among different types of

assets. For example, the relative efficiency of heavy highway construction
equipment is impacted less rapidly by technological changes than automated
manufacturing equipment. In general, the costs per unit of production, as wellas
quality and other factors, are favorably impacted by changes in technology, which
result in more frequent replacement of existing assets with new and better
challengers.
Reason 2 (altered requirements) and Reason 3 (technology) are sometimes referred to

as different categories of obsolescence. In any replacement problem, factors from more than
one of these three major areas may be involved. Regardless of the specific considerations, the
replacement of assets often represents an economic opportunity for the firm.
Example 1. Replacement Analysis Using Present Worth (Before Taxes)

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 MV. It is believed
that ₱30,000 could be obtained for the old pressure vessel if it were sold now. A new
pressure vessel can be purchased for ₱120,000. The new pressure vessel will have
an MV 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.
Solution
The first step in the analysis is to determine the investment value of the defender
(old pressure vessel). Using the outsider viewpoint, the investment value of the
defender is ₱30,000, its present MV. We can now compute the PW (or FW or AW)
of each alternative and decide whether the old pressure vessel should be kept in
service or replaced immediately.
Defender: PW (20%) = −₱30,000 − ₱60,000(P/A, 20%, 5)

= −₱209,436.
Challenger: PW(20%) = −₱120,000 − ₱30,000(P/A, 20%, 5) + ₱50,000 (P/F, 20%,5)

= −₱189,623.
The PW of the challenger is greater (less negative) than the PW of the defender.
Thus, the old pressure vessel should be replaced immediately. (The EUAC of
the defender is ₱70,035 and that of the challenger is ₱63,410.)
D. Economic Service Life

• The economic service life (ESL) is the number of years n at which the equivalent
uniform annual worth (AW) of costs is the minimum, considering the most current
cost estimates over all possible years that the asset may provide a needed service.
• The ESL is also referred to as the economic life or minimum cost life. Once
determined, the ESL should be the estimated life for the asset used in an
engineering economy study, if only economics are considered.
• When n years have passed, the ESL indicates that the asset should be replaced to
minimize overall costs.
The figure shows the characteristic shape of a total AW of cost curve. The CR
component of total AW decreases, while the AOC component increases, thus forming the
concave shape.
The ESL is determined by calculating the total AW of costs if the asset is in service 1
year, 2 years, 3 years, and so on, up to the last year the asset is considered useful. Total AW
of costs is the sum of capital recovery (CR), which is the AW of the initial investment and any
salvage value, and the AW of the estimated annual operating cost (AOC), that is,
𝑇𝑜𝑡𝑎𝑙 𝐴𝑊 = 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦 − 𝐴𝑊 𝑜𝑓 𝑎𝑛𝑛𝑢𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠

= 𝐶𝑅 − 𝐴𝑊 𝑜𝑓 𝐴𝑂𝐶
The ESL is the n value for the smallest total AW of costs. (Remember: These AW
values are cost estimates, so the AW values are negative numbers. Therefore, ₱–200 is a
lower cost than ₱-500.)
The two AW components are calculated as follows.
Decreasing cost of capital recovery. The capital recovery is the AW of

investment; it decreases with each year of ownership. The salvage value S , which
usually decreases with time, is the estimated market value (MV) in that year.
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑦 = −𝑃(𝐴/𝑃, 𝑖, 𝑛) + 𝑆(𝐴/𝐹, 𝑖, 𝑛)
Increasing cost of AW of AOC. Since the AOC (or M&O) estimates usually increase
over the years, the AW of AOC increases. To calculate the AW of the AOC series for 1, 2, 3,
. . . years, determine the present worth of each AOC value with the P/F factor, then redistribute
this P value over the years of ownership, using the A/P factor.
The complete equation for total AW of costs over k years (k = 1, 2, 3, . . . ) is
where
P = initial investment or current market value
Sk = salvage value or market value after k years
AOCj = annual operating cost for year j ( j = 1 to k )
Example 2.
A 3-year-old backup power system is being considered for early replacement.
Its current market value is ₱20,000. Estimated future market values and annual
operating costs for the next 5 years are given in Table 11–1, columns 2 and 3. What is
the economic service life of this defender if the interest rate is 10% per year? Solve by
hand
As an illustration, the computation of total AW for k=3 is
Total AW3 = -P(A/P,i,3) + MV3(A/F,i,3) - [PW of AOC1,AOC2, and AOC3](A/P,i,3)

= 20,000(A/P,10%,3) + 6000(A/F,10%,3) - [5000(P/F,10%,1) +6500
(P/F,10%,2) + 8000(P/F,10%,3)](A/P,10%,3)
= -6230 – 6405
= ₱ 12,635
A similar computation is performed for each year 1 through 5. The lowest

equivalent cost (numerically largest AW value) occurs at k = 3. Therefore, the defender
ESL is n=3 years, and the AW value is ₱ -12,635. In the replacement study, this AW
will be compared with the best challenger AW determined by a similar ESL analysis.
E. After-Tax Replacement Studies
The replacement of an asset often results in gains or losses from the sale of the existing
asset (defender). The income tax consequence resulting from the gain (loss) associated with
the sale (or retention) of the defender has the potential to impact the decision to keep the
defender or to sell it and purchase the challenger. The remainder of this section is devoted to
demonstrating the procedure for performing replacement analyses on an after-tax basis. Note
that after-tax replacement analyses require knowledge of the depreciation schedule already
in use for the defender, as well as the appropriate depreciation schedule to be used for the
challenger.
a. Illustrative After-Tax Replacement Analyses
The following examples represent typical after-tax replacement analyses. They
illustrate the appropriate method for including the effect of income taxes, as well as
several of the factors that must be considered in general replacement studies.
Example 3. After-Tax EUAC Analysis

The manager of a carpet manufacturing plant became concerned about the
operation of a critical pumping one of the processes. After discussing this situation with
the supervisor of plant engineering, they decided that a replacement study should be
done and that a nine-year study period would be appropriate for this situation. The
company that owns the plant is using an after-tax MARR of 6% per year for its capital
investment projects. The effective income tax rate is 40%.
The existing pump, Pump A, including driving motor with integrated controls,
cost ₱17,000 five years ago. The accounting records show the depreciation schedule
to be following that of an asset with a MACRS (ADS) recovery period of nine years.
Some reliability problems have been experienced with Pump A, including annual
replacement of the impeller and bearings at a cost of ₱1,750. Annual expenses have
been averaging ₱3,250. Annual insurance and property tax expenses are 2% of the
initial capital investment. It appears that the pump will provide adequate service for
another nine years if the present maintenance and repair practice is continued. An
estimated MV of ₱750 could be obtained for the pump if it is sold now. It is estimated
that, if this pump is continued in service, its final MV after nine more years will be about
₱200.
An alternative to keeping the existing pump in service is to sell it immediately
and to purchase a replacement pump, Pump B, for ₱16,000. A nine-year class life
(MACRS five-year property class) would be applicable to the new pump under the
GDS. An estimated MV at the end of the nine-year study period would be 20% of the
initial capital investment. Operating and maintenance expenses for the new pump are
estimated to be ₱3,000 per year.
Summary of Information
MARR (after taxes) = 6% per year

Effective income tax rate = 40%
Existing Pump A (defender)
MACRS (ADS) recovery period 9 years
Capital investment when purchased five years ago ₱17,000
Total annual expenses ₱5,340
Present MV ₱750
Estimated market value at the end of nine additional years ₱200
Replacement Pump B (challenger)
MACRS (GDS) property class 5 years
Capital investment ₱16,000
Total annual expenses ₱3,320
Estimated MV at the end of nine years ₱3,200
Annual taxes and insurance would total 2% of the initial capital investment. The data
for Example 3 are summarized in Summary of Information.
Based on these data, should the defender (Pump A) be kept [and the challenger (Pump
B) not purchased], or should the challenger be purchased now (and the defender sold)? Use
an after-tax analysis and the outsider viewpoint in the evaluation.
The after-tax computations for keeping the defender (Pump A) and not purchasing the
challenger (Pump B) are shown in Summary of Information. Year zero of the analysis period
is at the end of the current (fifth) year of service of the defender. The year-zero entries of
Summary of Information are computed using the general format and are further explained in
the following:
ATCF Computations for the Defender (Existing Pump A)

(B) (C) = (A) − (B) (D) = −0.4(C)
End of (A) MACRS (ADS) Taxable Income Taxes (E) = (A) + (D)
a
Year, k BTCF Depreciation Income at 40% ATCF
0 −$750 None $7,750 −$3,100 −$3,850
1–4 −5,340 $1,889 −7,229 2,892 −2,448
5 −5,340 944 −6,284 2,514 −2,826
6–9 −5,340 0 −5,340 2,136 −3,204
9 200 200 b −80 120
a Before-tax cash flow (BTCF).
b Gain on disposal (taxable at the 40% rate).
1. BTCF (−₱750): The same amount used in the before-tax analysis of Example 9-3. This
amount is based on the outsider viewpoint and is the opportunity cost of keeping the
defender instead of replacing it (and selling it for the estimated present MV of ₱750).
2. Taxable income (₱7,750): This amount is the result of an increase in taxable income of
₱7,750 due to the tax consequences of keeping the defender instead of selling it.
Specifically, if we sold the defender now, the loss on disposal would be as follows:
Gain or loss on disposal (if sold now) = MV0 − BV0,
BV0 = ₱17,000[1 − 0.0556 − 4(0.1111)] = ₱8,500,
Loss on disposal (if sold now) = ₱750 − ₱8,500 = −₱7,750.
But since we are keeping the defender (Pump A) in this alternative, we have
the reverse effect on taxable income, an increase of ₱7,750 due to an opportunity
forgone.
3. Cash flow for income taxes (−₱3,100): The increase in taxable income because of the tax
consequences of keeping the defender results in an increased tax liability (or tax credit
forgone) of −0.4(₱7,750) = −₱3,100.
4. ATCF (−₱3,850): The total after-tax investment value of the defender is the result of two
factors: the present MV (₱750) and the tax credit (₱3,100) forgone by keeping the existing
Pump A. Therefore, the ATCF representing the investment in the defender (based on the
outsider viewpoint) is −₱750− ₱3,100 = −₱3,850.
The next step in an after-tax replacement study involves equivalence calculations using an after-tax
MARR. The following is the after-tax EUAC analysis for Example 3:
EUAC(6% ) of Pump A(defender) = ₱3,850(A/P, 6%, 9) + ₱2,448(P/A, 6%, 4)(A/P, 6%, 9)

+ [₱2,826(F/P, 6%, 4) + ₱3,204(F/A, 6%, 4) − ₱120]
× (A/F, 6%, 9)
= ₱3,332;
ATCF Computations for the Challenger (Replacement Pump B)

(B) (C) = (A) − (B) (D) = −0.4(C)
End of (A) MACRS (ADS) Taxable Income Taxes (E) = (A) + (D)
Year, k BTCFa Depreciation Income at 40% ATCF
0 −₱16,000 None −₱16,000
1 −3,320 ₱3,200 −₱6,520 ₱2,608 −712
2 −3,320 5,120 −8,440 3,376 56
3 −3,320 3,072 −6,392 2,557 −763
4 −3,320 1,843 −5,163 2,065 −1,255
5 −3,320 1,843 −5,163 2,065 −1,255
6 −3,320 922 −4,242 1,697 −1,623
7–9 −3,320 0 −3,320 1,328 −1,992
9 3,200 3,200a −1,280 1,920
EUAC(6% ) of Pump B (challenger) = ₱16,000(A/P, 6%, 9) + [$712(P/F, 6%, 1) −

₱56(P/F, 6%, 2) + $763(P/F, 6%, 3)+ · · · +
₱1,992(P/F, 6%, 9)](A/P, 6%, 9)− $1,920
(A/F, 6%, 9)
= ₱3,375.
Because the EUACs of both pumps are very close, other considerations, such as the
improved reliability of the new pump, could detract from the slight economic preference for
Pump A. The after-tax annual costs of both alternatives are considerably less than their
before-tax annual costs.
The after-tax analysis does not reverse the results of the before-tax analysis for this
problem (see Example 9-3). Due to income tax considerations, however, identical before-tax
and after-tax recommendations should not necessarily be expected.
VI. LEARNING ACTIVITIES

Answer the following questions in a HANDWRITTEN FORM using the format and attach
it in the designated ASSIGNMENT tab in our Google Classroom.
1. In conducting a replacement study wherein, the planning horizon is unspecified, list

three assumptions that are inherent in an annual worth analysis of the defender
and challenger.
VII. ASSIGNMENT
Answer the following questions in a HANDWRITTEN FORM using the format and
attach it in the designated ASSIGNMENT tab in our Google Classroom.
1. An asset that was purchased 3 years ago for ₱100,000 is becoming obsolete faster
than expected. The company thought the asset would last 5 years and that its book
value would decrease by ₱20,000 each year and, therefore, be worthless at the end
of year 5. In considering a more versatile, more reliable high-tech replacement, the
company discovered that the presently owned asset has a market value of only
₱15,000. If the replacement is purchased immediately at a first cost of ₱75,000 and
if it will have a lower annual worth, what is the amount of the sunk cost? Assume the
company’s MARR is 15% per year.
2. A civil engineer who owns his own design/build/operate company purchased a
small crane 3 years go at a cost of ₱60,000. At that time, it was expected to be
used for 10 years and then traded in for its salvage value of ₱10,000. Due to
increased construction activities, the company would prefer to trade for a new,
larger crane now that will cost ₱80,000. The company estimates that the old crane
can be used, if necessary, for another 3 years, at which time it would have a
₱23,000 estimated market value. Its current market value is estimated to be
₱39,000, and if it is used for another 3 years, it will have M&O costs (exclusive of
operator costs) of ₱17,000 per year. Determine the values of P, n , S , and AOC
that should be used for the existing crane in a replacement analysis.
3. To improve package tracking at a UPS transfer facility, conveyor equipment was
upgraded with RFID sensors at a cost of $345,000. The operating cost is expected
to be $148,000 per year for the first 3 years and $210,000 for the next 3 years. The
salvage value of the equipment is expected to be $140,000 for the first 3 years, but
due to obsolescence, it won’t have a significant value after that. At an interest rate
of 10% per year, determine
(a) The economic service life of the equipment and associated annual worth
(b) The percentage increase in the AW of cost if the equipment is retained 2
years longer than the ESL
4. The annual worth values for a defender, which can be replaced with a similar used
asset, and a challenger are estimated. The defender should be replaced?
Number of AW Value, $ per Year

Years Retained Defender Challenger
1 -14,000 -21,000
2 -13,700 -18,000
3 -16,900 -13,100
4 -17,000 -15,600
5 -18,000 -17,500
VIII. REFERENCES
ARREOLA, M. Engineering Economy. Second Edition. Manila: KEN, Inc.
BESAVILLA, V. I. 1989. Engineering Economics. Cebu City Philippines: VIB Publishers.
BLANK, L and TARQUIN, A. 2012. Engineering Economics. New York, USA:McGraw-Hill

Companies Inc.
CUARESMA, F.D. 1995-2000. Handouts in Engineering Economy.
CUARESMA, F.D. 2002. Economics of Precision Irrigation Systems. Paper delivered

during the Training on Precision Irrigation Systems for High Productivity and Efficient
Water Management, 4-6 Sept. 2002.
SULLIVAN, William G., Bontadelli James A, and Wicks, Elin M.. 2000. Engineering
Economy. 11th Edition. McMillan Pub. Co., New York: (recommended text
book)
KASNER, E. Essentials of Engineering Economy. New York: Mc. Graw-Hill Book Co.
RIGGS, J.L., D.D. BEDWORTH., and S.U. RANDHAWA, S.U.1998. 4th Ed. Engineering
Economics . New York: Mc Graw-Hill.
STA. MARIA, H. Engineering Economy Reviewer. Third Edition.
SEPULVEDA, J., SOUDER, W., GOTTFRIED, S.. Theory and Problems of Engineering
Economics. McGraw-Hill Companies:USA. 1984
THUESEN, G.J. and W.J. FABRICKY, W. J. Engineering Economy. New Jersey: Prentice
Hall, Inc. 1989.

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Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

IM No.: ENG ECON – 1STSEM-2020-2021

DEGREE PROGRAM BSCE COURSE NO. ENG ECON

I. UNIT TITLE/CHAPTER TITLE

II. LESSON TITLE

III. LESSON OVERVIEW

IV. DESIRED LEARNING OUTCOMES

A decision situation often encountered in business firms and government

B. Basics of Replacement Study

replacement. A replacement study compares these two alternatives. The

• The nonowner’s viewpoint, also called the outsider’s viewpoint or consultant’s

C. Reasons for Replacement Analysis

1. Physical Impairment (Deterioration). These are changes that occur in the

3. Technology The impact of changes in technology varies among different types of

Reason 2 (altered requirements) and Reason 3 (technology) are sometimes referred to

Example 1. Replacement Analysis Using Present Worth (Before Taxes)

A firm owns a pressure vessel that it is contemplating replacing. The old

Defender: PW (20%) = −₱30,000 − ₱60,000(P/A, 20%, 5)

Challenger: PW(20%) = −₱120,000 − ₱30,000(P/A, 20%, 5) + ₱50,000 (P/F, 20%,5)

D. Economic Service Life

𝑇𝑜𝑡𝑎𝑙 𝐴𝑊 = 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦 − 𝐴𝑊 𝑜𝑓 𝑎𝑛𝑛𝑢𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠

Decreasing cost of capital recovery. The capital recovery is the AW of

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑦 = −𝑃(𝐴/𝑃, 𝑖, 𝑛) + 𝑆(𝐴/𝐹, 𝑖, 𝑛)

Total AW3 = -P(A/P,i,3) + MV3(A/F,i,3) - [PW of AOC1,AOC2, and AOC3](A/P,i,3)

A similar computation is performed for each year 1 through 5. The lowest

Example 3. After-Tax EUAC Analysis

MARR (after taxes) = 6% per year

ATCF Computations for the Defender (Existing Pump A)

EUAC(6% ) of Pump A(defender) = ₱3,850(A/P, 6%, 9) + ₱2,448(P/A, 6%, 4)(A/P, 6%, 9)

ATCF Computations for the Challenger (Replacement Pump B)

EUAC(6% ) of Pump B (challenger) = ₱16,000(A/P, 6%, 9) + [$712(P/F, 6%, 1) −

VI. LEARNING ACTIVITIES

1. In conducting a replacement study wherein, the planning horizon is unspecified, list

Number of AW Value, $ per Year

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BESAVILLA, V. I. 1989. Engineering Economics. Cebu City Philippines: VIB Publishers.

BLANK, L and TARQUIN, A. 2012. Engineering Economics. New York, USA:McGraw-Hill

CUARESMA, F.D. 1995-2000. Handouts in Engineering Economy.

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