THE MAHARAJA SAYAJIRAO UNIVERSITY

OF BARODA, GUJARAT

FACULTY OF TECHNOLOGY AND

ENGINEERING

Subject : - INDUSTRIAL ENGINEERING (IE)

Seminar on “REPLACEMENT ANALYSIS”

Name : - Kansara Vivek Manojbhai

Roll No : - 196

Course : - ME Part 2

PRN : 8021070892
In replacement, one is concerned with equipment and machinery that deteriorates
with the passage of time.

Since over time, an equipment ages, every piece of equipment in an industry is a

candidate for replacement.

However, with increasing maintenance, the productive life of an equipment can be

increased but the maintenance cost goes high. Replacement whereas reduces
maintenance cost, it involves a high average capital cost.

It is decided to replace an equipment when the maintenance and capital costs of the
defender equipment is more than the average capital and operating costs of the
replacement i.e. the challenger equipment.

Many people feel that an equipment should not be replaced until it is physically worn
out but it is not correct; preferably equipments must be constantly renewed and
updated otherwise there is increasing risk that it will become obsolete.
 - : REASONS FOR REPLACEMENT : -

1. Deterioration :

- Deterioration is the decline in performance of an equipment as compared to a new

equipment identical to the present one.

- Deterioration may occur due to equipment wear and tear, misalignments, etc.

- Deterioration
• Increases maintenance cost
• Reduces product quality
• Decreases rate of production
• causes loss in operating time
• Increases labour costs
• reduces efficiency of the equipment
2. Obsolescence :

- Technology is progressing rapidly newer and better equipments are being

developed and turned out every year.

- If management of a concern does not go for a change in the equipment or

machinery, the unwarranted manufacturing costs arising from obsolete
equipment that will seriously impair the concern's competitive position in
the market and also reduces profit.

- A first class machine, but producing only 30 pieces per hour is rendered
obsolete in spite of its excellent mechanical condition, when another new
machine capable of satisfactorily producing 50 pieces per hour comes into
the market; because with the new machine cost per piece produced is much
lower.
3. Inadequacy :

- When an existing equipment becomes inadequate to meet the challenge of making

new products or existing product in large quantities, the question of replacement
arises.
- An existing pit furnace may be melting gray cast iron till present in a foundry, but
huge orders necessitate its replacement by a cupola. The pit crucible furnace is
inadequate to boost the production rate.
- A milling machine may not become obsolete, but it is inadequate in producing
gears on mass production. Under such conditions one may go for automatic gear
cutting machines and form cutters.

4. Working Conditions :

- It may be thought of replacing old equipments and machinery which create

unpleasant (i.e. smoky, noisy, etc.) and hazardous working conditions causing worker
unsafety and leading to accidents.
 - : FACTORS TO BE CONSIDERED FOR REPLACING EQUIPMENTS : -

Two main factors are:

• Financial factors
• Technical factors

• Financial factors : They are

1. The initial cost of the challenger
2. Operating expenses : They include
- Direct and indirect labour cost
- Direct and indirect material cost
- Power
- Maintenance cost
- Cost of replacing parts,Insurance
- Interest on invested capital, etc.
3. Expected salvage value at the end of the service life
• Technical factors : It includes

- Whether the present equipment has deteriorated, i.e., whether it is functioning

properly or not?
- Whether the present equipment has become obsolete?
- Is the present equipment inadequate in meeting production rate ?
- Can the present equipment provide required surface finish?
- Is the new equipment better designed from a method's standpoint ?
- Is the present equipment polluting or spoiling working conditions of the factory ?
- is the present equipment making more noise and vibrations and thus distracting
the attentionof the workers?
- Is the existing equipment hard on the workers ?
- Does the existing equipment increase likelihood of accidents ?
- To what extent the existing equipment is not capable of making use of the newer
developments in the field ?
- How often the existing equipment needs mainnance and repairs ?
 - : METHODS USED IN SELECTION OF ALTERNATIVES : -

• A well designed equipment replacement policy should compare thoroughly

an existing equipment with its possible replacement or replacements.

• In order to make a sound economic comparison, all the factors should be

converted into cost considerations.

• Several common methods used for evaluating proposals for capital

expenditures and for comparing and selecting alternative machines or
equipments involving capital assets are as below :

1. Total life average method,

2. Annual cost method,
3. Present worth method,
4. Rate of return method,
5. MAPI method,
6. Approximate MAPI solution.
1. Total Life Average Method :
Steps involved
(i) Add the initial cost of the machine and its operating expenses.
(ii) Divide this figure by the estimated life of the machine to arrive at the
average annual cost.

Example 1 : The following data are available for the existing equipment and for the
proposed equipment to replace the existing one. Find whether the concern should
go for replacement or not.

Factors Existing Machine New Machine

Cost 5,000 8,500
Operating Expences (Annual) 1,500 2,000
Scrap Value 1,000 1,500
Interest 10 % 10 %
Life Of Machine 5 years 7 years
 Solution :
Existing Machine New Machine

Depreciation = 5000 – 1000 = 8500 – 1500

= 4000 = 7000

Operating Cost = 1500 × 5 = 1000 × 7

= 7500 = 7000

Interest at 10 % == 500
1700
+ 420 + 340 + 260 + 180 = 850 + 750 + 650 + 550 + 450 + 350 + 250
= 3850

Total Life Cost = 13,200 = 17,850

Average Cost = 13200 ÷ 5 = 17850 ÷ 7

Per Year = 2640 = 2550
Conclusion : We prefer new machine over existing one as average cost per year is less for it
Example 2 : An existing piece of equipment has its market value as Rs. 10,000, maintenance
Cost of Rs. 1000 per year, a life of 10 years and no scrap value. The proposed new equipment
for replacement Has an installed cost of Rs. 1,00,000, maintenance cost Rs. 800 per year, a life
of 50 years and scrap value of 16,000. Suggest if the proposed equipment should be purchased.
Solution :

Existing Piece of Equipment New Piece of Equipment

= 1,00,000 – 16,000
Depreciation = 10,000 = 84,000

Maintenance Cost = 1000 × 10 = 800 × 50

= 10,000 = 40,000
Total Life Cost = 20,000 = 1,24,000
Average Cost = 10,000 ÷ 10 = 1,24,000 ÷ 50
Per Year = 1,000 = 2,480
Conclusion : We prefer existing piece of equipment over new one as
average cost per year is less for it.
2. Annual Cost Method :

Annual cost method of evaluating alternatives, compares the annual costs of

obtaining service from different equipments.

Annual Cost = Capital recovery + Operating Costs.

The annual cost of capital recovery (CR) is calculated as follows (for equal annual
costs) :
Notations :
CR = capital recovery
P = first cost of equipment
L = salvage value at the end of life
of equipment
n = life of equipment in years
i = interest rate.
CRF = capital recovery factor
 Example 1 : Given below is the data for two equipments. Find out which alternative
you will select.

Equipment : 1 Equipment : 2
Initial Cost Rs. 10,000 Rs. 15,000
Annual Operating Cost Rs. 1,000 Rs. 800
Life Of The Equipment 8 Years 8 Years
Salvage Value Rs. 1,000 Rs. 3,000
Interest Rate 5% 5%

Solution : i ( 1 + i )n 0.05 ( 1 + 0.05 )8 0.07387

CRF = ---------------- = ----------------------- = -------------- = 0.1547
( 1 + i )n - 1 ( 1 + 0.05 )8 – 1 0.4774
 Equipment : 1 Equipment : 2
CR = ( P – L ) ( CRF ) + L × i CR = ( P – L ) ( CRF ) + L × i

= ( 10000 – 1000 ) (0.1547) + 1000 × 0.05 = ( 15000 – 3000 ) (0.1547) + 3000 × 0.05
= 1392.3 + 50 = 1856.4 + 150
= 1442.3 = 2006.4
Total Annual Cost :
Total Annual Cost :
= CR + Operating Cost
= CR + Operating Cost
= 2006.4 + 800
= 1442.3 + 1000
= 2806.4
= 2442.3

Conclusion : We prefer equipment 1 over 2nd one as total annual cost is less for it.
Example : For the given data below suggest whether to purchase the new machine or not.

Old Existing Machine New Proposed Machine

Market value = Rs. 30,000 Installed cost = Rs. 1,00,000

Overhaul charges to make it work for Expected life = 15 years

another 5 years = Rs. 25,000

Resale value = Rs. 40,000 Resale value = Rs. 10,000

Maintenance cost = Rs. 300 per year Maintenance cost = Rs. 100 per year

Assume interest rate of 10 %

Solution :

For n = 5 & i = 10 %

i ( 1 + i )n 0.1 ( 1 + 0.1 )5 0.161

CRF = ----------------- = ----------------------- = -------------- = 0.2638
( 1 + i )n - 1 ( 1 + 0.1 )5 – 1 0.6105

For n = 15 & i = 10 %

i ( 1 + i )n 0.1 ( 1 + 0.1 )15 0.4177

CRF = ----------------- = ----------------------- = -------------- = 0.13147
( 1 + i )n - 1 ( 1 + 0.1 )15 – 1 3.1772
 Old Existing Machine New Proposed Machine

CR = ( P – L ) ( CRF ) + L × i CR = ( P – L ) ( CRF ) + L × i
= ( 30000 + 25000 – 40000 ) (0.2637) + = ( 100000 – 1000 ) (0.13147) +
40000 × 0.1 10000 × 0.1
= 3957 + 4000 = 11823.3 + 1000
= 7957 = 12823.3

Total Annual Cost : Total Annual Cost :

= CR + Maintenance Cost = CR + + Maintenance Cost
= 7957 + 300 = 12823.3 + 100
= 8257
= 12923.3

Conclusion : We prefer old existing machine over new one as total annual cost is less for it.
 NK Y OU
THA