REPLACEMENT OF ITEMS WITH GRADUAL DETERIORATION

rob|em 1
Now we take an example in which an automobile Ileet owner has the Iollowing direct operation cost (Petrol and oil) and increased maintenance cos
The initial cost oI the vehicle is Rs. 70, 000. The operation cost, the maintenance cost and the resale price are all given in table 1 Ior Iive years.
Table 1
Year oI
service
Annual
operating
cost
(Rs.)
Annual
maintena
nce cost
(Rs.)
Resale
value (Rs.)
1 10000 6000 40000
2 15000 8000 20000
3 20000 12000 15000
4 26000 16000 10000
5 32000 20000 10000
SoluLlon lnLlal CosL of vehlcle 70000
Year oI
service
Annual
operating
cost
(Rs.)
Annual
maintena
nce cost
(Rs.)
Total
Running
Cost
Cummulativ
e Running
Cost
Capital Cost
Total
Cost
Average
Annual
Cost
A B C D E F G H
(BC)
Intial cost-
Resale value
(EF) H/A
1 10000 6000 16000 16000 30000 46000 46000
2 15000 8000 23000 39000 30000 89000 44300
3 20000 12000 32000 71000 33000 126000 42000
4 26000 16000 42000 113000 60000 173000 43230
5 32000 20000 32000 163000 60000 223000 43000
The average annual cost is least at the end oI three years. (equal to 42,000). Hence this is the best time to purchase a new vehicle.
rob|em 2
A mill owner Iinds Irom his past records the costs oI running a machine whose purchase price is Rs. 6000 are as given below.
Year 1 2 3 4 5 6 7
Running
cost (Rs.)
1000 1200 1400 1800 2300 2800 3400
Resale
value (Rs.)
3000 1500 750 375 200 200 200
Determine at what age is a replacement due?
lnLlal CosL 6000
SoluLlon
Year oI
service
Annual
operating
cost
(Rs.)
Annual
maintena
nce cost
(Rs.)
Total
Running
Cost
Cummulativ
e Running
Cost
Capital Cost
Total
Cost
Average
Annual
Cost
A B C D E F G H
(BC)
Intial cost-
Resale value
(EF) H/A
1 1000 1000 3000 4000 4,000
2 1200 2200 4500 6700 3,350
3 1400 3600 5250 8850 2,950
4 1800 5400 5625 11025 2,756
5 2300 7700 5800 13500 2,700
6 2800 10500 5800 16300 2,717
7 3400 13900 5800 19700 2,814
lL ls evldenL LhaL average annual cosL ls mlnlmum ln 3 years lL ls rlghL Llme for replacemenL