INTRODUCTION

The problem of replacement is to decide the time

when an equipment(machine) should be replaced
economically by another of the same type or a
different one.
Case: 1
Initially we assume that there is no time value of
money.
The average cost 1

TA  C  S   f ( n )
n

Where
 C = the purchase price of the equipment
S = the scrap value / resale value / salvage value
 f  n  = The maintenance cost of the equipment.
 Problem 1:
The cost of a machine is Rs. 6100 and its scrap value
Rs. 100. the maintenance cost found from experience
are as follows.
Year 1 2 3 4 5 6 7 8
Mainte 100 250 400 600 900 1200 1600 2000
nance
cost

When should the machine be replaced?

Solution
Year(n) Maint.cost Cumulative C-S Total cost Average
f(n) maint. Cost ∑ f(n) T=C–S+ Total cost
∑f(n) TA = T/n
1 100 100 6000 6100 6100
2 250 350 6000 6350 3175
3 400 750 6000 6750 2250
4 600 1350 6000 7350 1837
5 900 2250 6000 8250 1650
6 1200 3450 6000 9450 1575
7 1600 5050 6000 11050 1579
8 2000 7050 6000 13050 1631
Conclusion:
This table shows that the average total cost during
the 6th year is minimum. Hence the machine should
be replaced after every six year.
Problem 2
A firm is considering replacement of machine whose
cost price is Rs. 12200, and the scrap value is only Rs.
200 the maintenance cost (in rupees) are found from
experience to be as follows.
Year 1 2 3 4 5 6 7 8
Main. 200 500 800 1200 1800 2500 3200 4000
Cost

When should the machine be replaced?

Solution
Year (n) M ain. ∑ f(n) C-S T= C- S TA = T / n
Cost f(n) +∑f(n)
1 200 200 12000 12200 12200
2 500 700 12000 12700 6350
3 800 1500 12000 13500 4500
4 1200 2700 12000 14700 3675
5 1800 4500 12000 16500 3300
6 2500 7000 12000 19000 3167
7 3200 10200 12000 22200 3171
8 4000 14200 12000 26200 3275
Conclusion: This table shows that the average total
cost during the 6th year is minimum. Hence the
machine should be replaced after every 6th year.
 Problem 3
Following table gives the running cost per year and
resale price of a certain equipment whose purchase
price is Rs. 5000.

Year 1 2 3 4 5 6 7 8
Running 1500 1600 1800 2100 2500 2900 3400 4000
cost
Resale 3500 2500 1700 1200 800 500 500 500
Value

At what year is the replacement due?

Solution
Year (n) F(n) ∑f(n) S(n) C-S T=C-S TA
+∑f(n)
1 1500 1500 3500 1500 3000 3000
2 1600 3100 2500 2500 5600 2800
3 1800 4900 1700 3300 8200 2733
4 2100 7000 1200 3800 10800 2700
5 2500 9500 800 4200 13700 2740
6 2900 12400 500 4500 16900 2817
7 3400 15800 500 4500 20300 2900
8 4000 19800 500 4500 24300 3037

The above table shows that the total average cost during the 4th year is
minimum. Hence the equipment should be replaced every 4th year.
Problem 4
The following table gives the operation cost,
maintenance cost, and salvage cost at the end of every
year of a machine whose purchase value is Rs. 12,000.
Find the economic life of the machine assuming the
interest rate as 0%.
End of year (n) Operation Cost Maintenance Salvage value at
at the end of Cost at the end the end of year
year of year
1 2000 2500 8000
2 3000 3000 7000
3 4000 3500 6000
4 5000 4000 5000
5 6000 4500 4000
6 7000 5000 3000
7 8000 5500 2000
8 9000 6000 1000
Solution: f(n) = operation cost +
maintenance cost.
Year Opera Maint F(n) ∑f(n) S C–S T TA=
(n) tin enanc T/n
cost e cost
1 2000 2500 4500 4500 8000 4000 8500 8500
2 3000 3000 6000 10500 7000 5000 15500 7750
3 4000 3500 7500 18000 6000 6000 24000 8000
4 5000 4000 9000 27000 5000 7000 34000 8500
5 6000 4500 10500 37500 4000 8000 45500 9100
6 7000 5000 12000 49500 3000 9000 58500 9750
7 8000 5500 13500 63000 2000 10000 73000 10429
8 9000 6000 15000 78000 1000 11000 89000 11125
Conclusion
From the above table average total cost during 2 nd
year is minimum. Hence the equipment should be
replaced every 2nd year.