Replacement Models

04-10-2018
Replacement theory
REPLACEMENT MODELS
 Replacement theory deal in the decision making
Dr. Devendra Choudhary process of replacing a used equipment with a
Department of Mechanical Engineering substitute; mostly a new equipment of better usage.
Govt. Engineering College Ajmer
 The replacement might be necessary due to the

deteriorating property or failure or breakdown of
particular equipment.
Dr. Devendra Choudhary, Govt. Engineering College, Ajmer
Replacement models Types of replacement models

 ‘When to replace’……….an item, machine,  Model-I: Aging of machines
automobile etc.  Items that deteriorate with time e.g. machine tools,
 Situations are analyzed mathematically. vehicles, equipment buildings …
 Model-II: Availability of similar new machines with
better usages
 Items becoming out-of-date due to new developments
Hazard function h(t)
like ordinary weaving looms by automatic, manual

accounting by tally, computers, cars ...
Dr. Devendra Choudhary, Govt. Engineering College, Ajmer Dr. Devendra Choudhary, Govt. Engineering College, Ajmer
Dr. Devendra Choudhary 1

04-10-2018
Types of replacement models Model-I: Aging of machines

 Model-III: Aging of machines with time value of  To Find The Best Replacement Age (Time) of a Machine
money
 InModel-I, the depreciation of money (or present worth
Replace when average
factor) is considered in calculations. total cost is lowest
 Model-IV: Group replacement

 Replacement of Items that fail suddenly
 Items which do not deteriorate but fail completely after
certain amount of use like electronic parts, street lights...
 The total cost of machine in n years
= Cost of machine – Scrap value of machine + Total
maintenance cost in n years.
Model-I: Aging of machines Model-I: Aging of machines

 Do not replace if the next years maintenance cost  The maintenance cost and resale value per year of
is less than the previous years average total cost. a machine whose purchase price is Rs. 7000 is
given below:
 Replace if the next years maintenance cost is Year 1 2 3 4 5 6 7 8
greater than the previous years average total cost. Maint. 900 1200 1600 2100 2800 3700 4700 5900
cost
Resale 4000 2000 1200 600 500 400 400 400
value
 When should the machine be replaced?

04-10-2018
Model-I: Aging of machines Model-I: Aging of machines

Cum. Cum.
Purchase Maintenan Resale Ave. total Purchase Maintenan Resale Ave. total
Year Maint. Total cost Year Maint. Total cost
price ce cost value cost price ce cost value cost
Cost Cost
1 7000 900 900 4000 3900 3900.0 1 7000 900 900 4000 3900 3900.0
2 7000 1200 2100 2000 7100 3550.0 2 7000 1200 2100 2000 7100 3550.0
3 7000 1600 3700 1200 9500 3166.7 3 7000 1600 3700 1200 9500 3166.7
4 7000 2100 5800 600 12200 3050.0 4 7000 2100 5800 600 12200 3050.0
5 7000 2800 8600 500 15100 3020.0 5 7000 2800 8600 500 15100 3020.0
6 7000 3700 12300 400 18900 3150.0 6 7000 3700 12300 400 18900 3150.0
7 7000 4700 17000 400 23600 3371.4 7 7000 4700 17000 400 23600 3371.4
8 7000 Choudhary,
Dr. Devendra 5900 22900
Govt. Engineering 400
College, Ajmer 29500 3687.5 8 7000 Choudhary,
College, Ajmer 29500 3687.5
Model-II: Availability of similar new

Model-I: Aging of machines
machines with better usages
7000
Maintenance
Cum. cost
Purchase Maintenan Resale Ave. total Machine A costs Rs 9000. Annual operating cost are Rs 200
Year 6000 Maint.
Resale value Total cost
price ce cost value cost for the 1st year, and then increase by Rs 2000 every year.
Cost
5000 Ave. total cost Determine the best age at which to replace the machine. If
1 7000 900 900 4000 3900 3900.0
4000 the optimum replacement policy is followed, what will be the
2 3000 7000 1200 2100 2000 7100 3550.0 average yearly cost of owing and operating the machine ?
(Assume that the machine has no resale value when
3 2000 7000 1600 3700 1200 9500 3166.7
replaced, and that future cost are not discounted).
1000 7000
4 2100 5800 600 12200 3050.0 Machine B costs Rs 10,000. Annual operating costs are Rs 400
0 for the first year, and then increase by Rs 800 every year.
5 70001 22800 3 8600 5
4 500
6 7 15100
8 3020.0
 You have now a machine of type A which is one year old. Should
6 7000 3700 12300 400 18900 3150.0 you replace it with B, and if so when ?
 Suppose you are, just ready to replace machine A with another
7 7000 4700 17000 400 23600 3371.4 machine of the same type, when you hear that machine B will
8 7000 Choudhary,
College, Ajmer 29500 3687.5 become available in a year. What you should do ?

04-10-2018
Model-II: Availability of similar new Model-II: Availability of similar new

machines with better usages machines with better usages
Cum. Cum.
Purchase Maintena Resale Ave. Purchase Maintena Resale Ave.
Year Maint. Total cost Year Maint. Total cost
price nce cost value total cost price nce cost value total cost
Cost Cost
1 9000 200 200 0 9200 9200.0 1 10000 400 400 0 10400 10400.0
2 9000 2200 2400 0 11400 5700.0 2 10000 1200 1600 0 11600 5800.0
3 9000 4200 6600 0 15600 5200.0 3 10000 2000 3600 0 13600 4533.3
4 9000 6200 12800 0 21800 5450.0 4 10000 2800 6400 0 16400 4100.0
5 9000 8200 21000 0 30000 6000.0 5 10000 3600 10000 0 20000 4000.0
6 9000 10200 31200 0 40200 6700.0 6 10000 4400 14400 0 24400 4066.7
7 10000 5200 19600 0 29600 4228.6
Machine A should be replaced at the end of the 3rd year. The Machine B should be replaced at the end of the 5th year. The
average yearly cost in this situation will be Rs 5200. average yearly cost in this situation will be Rs 4000.

 Should we replace Machine A with Machine B?  Should we replace Machine A with Machine B?
 Replace existing machine with new one if:

Lowest average cost of new machine < Lowest average cost of existing machine
4000 (M/C B) < 5200 (M/C A)

04-10-2018

 Should we replace Machine A with Machine B?  When should we replace Machine A with Machine B?
 Replace existing machine with new one if:
Lowest average cost of new machine < Lowest average cost of existing machine
4000 (M/C B) < 5200 (M/C A)
 Since the lowest average cost Rs 4000 for machine

B is less than the lowest average cost Rs 5200 for
machine A, the Machine A should be replaced by
Machine B.

 When should we replace Machine A with Machine B?  When should we replace Machine A with Machine B?
 The machine A is replaced by machine B at the time  The machine A is replaced by machine B at the time
(age) when its running cost of the next year exceeds (age) when its running cost of the next year exceeds
the lowest average yearly cost Rs 4000 of machine B. the lowest average yearly cost Rs 4000 of machine B.
Year 1 2 3 4 5 6
Maintenan
ce cost of 200 2200 4200 6200 8200 10200
m/c A
Ave. Total
cost ob 4000 4000 4000 4000 4000 4000
m/c B
Dr. Devendra Choudhary, Govt. Engineering College, Ajmer Difference -3800Choudhary,
Dr. Devendra -1800 200
College, Ajmer 4200 6200

04-10-2018
Model-II: Availability of similar new Model-III: Aging of machines with time

machines with better usages value of money
 When should we replace Machine A with Machine B?  The value of money changes with time.
Year 1 2 3 4 5 6
Maintenance cost of  If we borrow Rs 100 at interest of 10% per year
200 2200 4200 6200 8200 10200
m/c A then after one year we have to return Rs 110.
Lowest Ave. Total
4000 4000 4000 4000 4000 4000  Thus Rs 110 after one year from now are
cost of m/c B
Difference -3800 -1800 200 2200 4200 6200 equivalent to Rs 100 today.
 The running cost of third year of machine A is Rs 4200  If the interest on Rs 1 is Rs ‘i’ per year, then the
which is more than the lowest average yearly cost Rs
4000 of machine B. present value of Rs 1 to be spent after n years from
 Therefore, the machine A should be replaced by machine now is Rs 1/(1+ i)n
B when its age is 2 years.
 Since the machine A is one year old now, therefore it
shouldDr.be replaced after one year from now.
Devendra Choudhary, Govt. Engineering College, Ajmer Dr. Devendra Choudhary, Govt. Engineering College, Ajmer
Model-III: Aging of machines with time Model-III: Aging of machines with time
value of money value of money
 Present Value or Present Worth of ‘P’ rupees spent  When to replace
after ‘n’ years from now.
 Replace if the operating cost of the next period
P*(1 + i )-n (year) is greater than the weighted average of the
previous cost.
Present worth factor or discounted factor = (1 + i )-n

04-10-2018
 When to replace  A firm pays Rs. 10000 for its equipment. Its
operating and maintenance costs is about Rs. 2500
 Replace if the operating cost of the next period per year for the first two years and then go up by
(year) is greater than the weighted average of the Rs. 1500 per year. When such equipment be
previous cost. replaced? The interest rate is 10%.
Or
 When weighted average annual cost is minimum
Comm. Comm.
PW of Resal PW of PW of Commul Weighted PW of Resal PW of PW of Commul Weighted
Maint PW of Maint PW of
Year Price PWF maint. e resale total ative average total Year Price PWF maint. e resale total ative average total
. Cost maint. . Cost maint.
Cost value value cost PWF cost Cost value value cost PWF cost
Cost Cost
1 10000 2500 1.0000 2500 2500 0 0 12500 1.0000 12500 1 10000 2500 1.0000 2500 2500 0 0 12500 1.0000 12500
2 10000 2500 0.9091 2272.7 4772.72 0 0 14772.7 1.9091 7738.1 2 10000 2500 0.9091 2272.7 4772.72 0 0 14772.7 1.9091 7738.1
3 10000 4000 0.8264 3305.7 8078.51 0 0 18078.5 2.7355 6608.7 3 10000 4000 0.8264 3305.7 8078.51 0 0 18078.5 2.7355 6608.7
4 10000 5500 0.7513 4132.2 12210.7 0 0 22210.7 3.4869 6369.8 4 10000 5500 0.7513 4132.2 12210.7 0 0 22210.7 3.4869 6369.8
5 10000 7000 0.6830 4781.1 16991.8 0 0 26991.8 4.1699 6473.1 5 10000 7000 0.6830 4781.1 16991.8 0 0 26991.8 4.1699 6473.1
6 10000 8500 0.6209 5277.8 22269.6 0 0 32269.6 4.7908 6735.7 6 10000 8500 0.6209 5277.8 22269.6 0 0 32269.6 4.7908 6735.7
7 10000 10000 0.5645 5644.7 27914.4 0 0 37914.4 5.3553 7079.8 7 10000 10000 0.5645 5644.7 27914.4 0 0 37914.4 5.3553 7079.8

04-10-2018
Model-III: Aging of machines with time

Model-III: Aging of machines with PWF
value of money Comm.
PW of Weighted
Maint. PW of PW of Commulat
 A manufacturer offered two machines A and B. A is Year Price PWF maint. average
Cost maint. total cost ive PWF
Cost total cost
priced at Rs 5000 and running cost are estimated at Rs Cost
800 for each of the first 5 years, increasing by Rs 200 1 5000 800 1.0000 800.0 800.0 5800.0 1.0 5800.0
per year in the 6th and subsequent years. 2 5000 800 0.9091 727.3 1527.3 6527.3 1.9 3419.0
 Machine B, which has the same capacity as A, costs Rs 3 5000 800 0.8264 661.2 2188.4 7188.4 2.7 2627.8
2500 but with running cost of Rs 1200 per year for the 4 5000 800 0.7513 601.1 2789.5 7789.5 3.5 2234.0
first six years, increasing by Rs 200 per year there
5 5000 800 0.6830 546.4 3335.9 8335.9 4.2 1999.1
after.
6 5000 1000 0.6209 620.9 3956.8 8956.8 4.8 1869.6
 If money is worth 10% per year, which machine should
be purchased? 7 5000 1200 0.5645 677.4 4634.2 9634.2 5.4 1799.0
 (Assume that the machine will eventually be sold for scrap at 8 5000 1400 0.5132 718.4 5352.6 10352.6 5.9 1764.1
negligible price.) 9* 5000 1600 0.4665 746.4 6099.0 11099.0 6.3 1752.0
10 5000 1800 0.4241 763.4 6862.4 11862.4 6.8 1755.0
Dr. Devendra Choudhary, Govt. Engineering College, Ajmer 11 Dr. Devendra
5000 Choudhary,
2000 Govt. Engineering
0.3855 771.1College, Ajmer 12633.5
7633.5 7.1 1768.3
Model-III: Aging of machines with PWF Model-III: Aging of machines with PWF
Comm.
PW of Weighted
Maint. PW of PW of Commulat
Year Price PWF maint. average
Cost maint. total cost ive PWF
Cost total cost
Cost Lowest ave.
1 2500 1200 1.0000 1200.0 1200.0 3700.0 1.0 3700.0 Time to replace
weighted cost
2 2500 1200 0.9091 1090.9 2290.9 4790.9 1.9 2509.5
3 2500 1200 0.8264 991.7 3282.6 5782.6 2.7 2113.9
Machine A
4 2500 1200 0.7513 901.6 4184.2 6684.2 3.5 1917.0 9 yr 1752.0
5 2500 1200 0.6830 819.6 5003.8 7503.8 4.2 1799.5
6 2500 1200 0.6209 745.1 5748.9 8248.9 4.8 1721.8 Machine B
8yr 1680.2
7 2500 1400 0.5645 790.3 6539.2 9039.2 5.4 1687.9
8* 2500 1600 0.5132 821.1 7360.3 9860.3 5.9 1680.2
It would be better to purchase machine B instead of A.
9 2500 1800 0.4665 839.7 8200.0 10700.0 6.3 1689.0
10 2500 2000 0.4241 848.2 9048.2 11548.2 6.8 1708.6
11 Dr. Devendra
2500 Choudhary,
2200 Govt. Engineering
0.3855 848.2College, Ajmer 12396.4
9896.4 7.1 1735.1 Dr. Devendra Choudhary, Govt. Engineering College, Ajmer

04-10-2018
Model-IV: Group replacement Model-IV: Group replacement

 There are certain items which do not deteriorate but  A long period between group replacements results
fail completely after certain amount of use. These in increase in cost of individual replacements, while
kinds of failures are analysed by the method called frequent group replacements are definitely costly.
as group replacement theory.  It is found that replacing these random failing items
 It should be noted that, group replacement does simultaneously at specific intervals is economical as
involve periodic simultaneous replacements along compared to replacing them only when an item
with individual replacements in between. fails.
 Few examples are fluorescent tubes, light bulbs,
electronic chips, fuse etc.

 The following morality rates have been observed for a Cumulative % % failure Probability Pi that a
certain type of light bulb: Week
failure till the end during the new bulb fails
(xi)
of the week week during the week
Week 1 2 3 4 5 1 10 10 0.10
% failing by
10 25 50 80 100
week end 2 25 15 0.15
3 50 25 0.25
 There are 1000 bulbs in use and it costs Rs 10 to replace an
individual bulb which has burnt out. If all bulbs were
replaced simultaneously it would cost Rs 2.5 per bulb. It is 4 80 30 0.30
proposed to replace all bulbs at fixed intervals, whether or
not they have burnt out and to continue replacing burnt out 5 100 20 0.20
bulbs Dr.asDevendra
they Choudhary,
fail. What wouldCollege,
Govt. Engineering be the
Ajmerbest policy to adopt? Dr. Devendra Choudhary, Govt. Engineering College, Ajmer

04-10-2018

 Cost of individual replacement:  Cost of group replacement:
 Expected life = ∑ xi*Pi  Let Ni be the number of replacements at the end of ith week,
while all 1000 bulbs were new initially, then we have
 Expected life = 1*.10+2*.15+3*.25+4*.30+5*.20
 N0 = 1000
 = 3.35 weeks
 N1 = N0*P1 = 1000*0.10=100
 Ave. cost of individual replacement per week
 N2 = N0*P2+ N1*P1 = 1000*0.15+100*.10=160
 = (# of units in operation/Expected life)*Cost of
individual replacement per unit  N3 = N0*P3+ N1*P2 + N2*P1 =
1000*0.25+100*.15+160*.10=281
 Ave. cost of individual replacement per week =
(1000/3.35)*10 = 2985  N4 = N0*P4+ N1*P3 + N2*P2 + N3*P1 =377.1
 N5 = N0*P5+ N1*P4 + N2*P3 + N3*P2 + N4*P1
=349.89

 Average cost of group replacement:  Average cost of group replacement:
Failure Cumm. Cost of Cost of Average cost Failure Cumm. Cost of Cost of Average cost
Total Total
Week during Failure during individual group of group Week during Failure during individual group of group
cost cost
week week replacement replacement replacement week week replacement replacement replacement
1 100 100 1000 2500 3500 3500 1 100 100 1000 2500 3500 3500
2 160 260 2600 2500 5100 2550 2* 160 260 2600 2500 5100 2550
3 281 541 5410 2500 7910 2636.67 3 281 541 5410 2500 7910 2636.67
4 377.1 918.1 9181 2500 11681 2920.25 4 377.1 918.1 9181 2500 11681 2920.25
5 349.8 1267.9 12679 2500 15179 3035.80 5 349.8 1267.9 12679 2500 15179 3035.80

04-10-2018

 What would be the best policy:  What would be the best policy:
Failure Cumm. Cost of Cost of Average cost Failure Cumm. Cost of Cost of Average cost
Total Total
Week during Failure during individual group of group Week during Failure during individual group of group
cost cost
week week replacement replacement replacement week week replacement replacement replacement
1 100 100 1000 2500 3500 3500 1 100 100 1000 2500 3500 3500
2* 160 260 2600 2500 5100 2550 2* 160 260 2600 2500 5100 2550
Ave. cost of individual replacement per week = 2985 Ave. cost of individual replacement per week = 2985
Group replacement is more economical. So, replace all
the bulbs at the end of second week and also replace
those fail during the first and second weeks.

Replacement Models

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04-10-2018

 The replacement might be necessary due to the

Dr. Devendra Choudhary, Govt. Engineering College, Ajmer

Replacement models Types of replacement models

like ordinary weaving looms by automatic, manual

Dr. Devendra Choudhary 1

Types of replacement models Model-I: Aging of machines

 Model-IV: Group replacement

Model-I: Aging of machines Model-I: Aging of machines

 When should the machine be replaced?

Dr. Devendra Choudhary 2

Model-I: Aging of machines Model-I: Aging of machines

Model-II: Availability of similar new

Dr. Devendra Choudhary 3

Model-II: Availability of similar new Model-II: Availability of similar new

Model-II: Availability of similar new Model-II: Availability of similar new

 Replace existing machine with new one if:

4000 (M/C B) < 5200 (M/C A)

Dr. Devendra Choudhary 4

Model-II: Availability of similar new Model-II: Availability of similar new

4000 (M/C B) < 5200 (M/C A)

 Since the lowest average cost Rs 4000 for machine

Model-II: Availability of similar new Model-II: Availability of similar new

Dr. Devendra Choudhary 5

Model-II: Availability of similar new Model-III: Aging of machines with time

Present worth factor or discounted factor = (1 + i )-n

Dr. Devendra Choudhary 6

Dr. Devendra Choudhary 7

Model-III: Aging of machines with time

Dr. Devendra Choudhary 8

Model-IV: Group replacement Model-IV: Group replacement

Model-IV: Group replacement Model-IV: Group replacement

Dr. Devendra Choudhary 9

Model-IV: Group replacement Model-IV: Group replacement

Model-IV: Group replacement Model-IV: Group replacement

Dr. Devendra Choudhary 10

Model-IV: Group replacement Model-IV: Group replacement

Dr. Devendra Choudhary 11

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