Lab 01

Title:
Replacement Theory

Objectives:
The objective of this lab is to solve replacement theory problems using MS Excel.

Apparatus:
MS Excel

Background:
The replacement theory is concerned with the situations that arise when some items such as
machines, electric light bulbs, computers, etc. need replacement due to their decreased
efficiency, failure or break-down. Such decreased efficiency or complete breakdown may either
be gradual or suddenly. The replacement problem arises primarily because of the following
reasons:

• The old item works badly or requires expensive maintenance.

• The old item has failed due to accident or otherwise and does not work at all, or the old
item is expected to fail shortly.
• A better or more efficient design of machine or equipment has become available in the
market.

Failure of item is of two types:

• Gradual failure
• Sudden failure.

Gradual Failure:

Gradual failure is progressive in nature, i.e., as the life of an item increases, its operational
efficiency also deteriorates. This results in:
 • Increase in running (maintenance and operating) costs.
• Decrease in its productivity.
• Decrease in the resale or salvage value.

Sudden Failure:

This type of failure occurs in items after some period of desired service rather than deterioration
while in service. The period of desired service is not constant but follows some frequency
distribution. Sudden failure may be progressive, retrogressive, or random in nature.

• Progressive failure - If the probability of failure of an item increases with the increase
in its life, then such a failure is called progressive failure. For example, light bulbs and
tubes fail progressively.
• Retrogressive failure - If the probability of failure at the beginning of the life of an item
is more but as time passes the chances of its failure become less, then such failure is
said to be retrogressive.
• Random failure - In this type of failure, the constant probability of failure is associated
with items that fail due to random causes but not related to age. For example, vacuum
tubes in air-born equipment have been found to fail at a rate independent of the age of
the tube.

The replacement situations may be placed into the following two main categories:

• Replacement of capital equipment that deteriorates with time, e.g., machine tools, buses
in transport organization, planes, etc.
• Individual or group replacement of items that fail completely, e.g., light bulbs, tubes,
etc.

Here the term ‘failure’ will be considered in the context of replacement decisions.

The Replacement Theory in Operations Research is used in the decision-making process of

replacing a used equipment with a substitute, mostly a new equipment of better usage.

So, we want perform the replacement theory problems in excel solver in order to get the desired
results.
Problem 1

Activity:

The cost of a machine is Rs. 6100/- and its scrap value is Rs. 100/- The maintenance cost found
from experience are as follows:

Table 1 Maintenance Cost (Problem 1)

Years 1 2 3 4 5 6 7 8
Maintenance cost 100 250 400 600 900 1200 1600 2000

When should the machine be replaced?

Solution:

Table 2 Solution (Problem 1)

Purchase Annual Cumulative Average

Years Price – Scrap Maintenance Maintenance Total Cost Annual Cost
value Cost Cost
1 6000 100 100 6100 6100
2 6000 250 350 6350 3175
3 6000 400 750 6750 2250
4 6000 600 1350 7350 1838
5 6000 900 2250 8250 1650
6 6000 1200 3450 9450 1575
7 6000 1600 5050 11050 1579
8 6000 2000 7050 13050 1631

Discussion:

So, the machine should be replaced at the end of the 6th year because average annual
replacement cost is least after 6 years which is Rs.1575/-.
Problem 2

Activity:

A machine owner finds from his past records that the costs per year of maintaining a machine
whose purchase price is Rs. 6000 are as given below:

Table 3 Maintenance cost & Resale cost (Problem 2)

Years 1 2 3 4 5 6 7 8
Maintenance cost 1000 1200 1400 1800 2300 2800 3400 4000
Cost Resale Price 3000 1500 750 375 200 200 200 200

Determine at which age is a replacement due?

Solution:

Table 4 Solution (Problem 2)

Maintenance Cumulative Purchase Average

Year Cost Maintenance Price–Resale Total Cost Cost per
Cost Price Year
1 1000 1000 3000 4000 4000
2 1200 2200 4500 6700 3350
3 1400 3600 5250 8850 2950
4 1800 5400 5625 11025 2756
5 2300 7700 5800 13500 2700
6 2800 10500 5800 16300 2717
7 3400 13900 5800 19700 2814
8 4000 17900 5800 23700 2963

Discussion:

So, the machine should be replaced at the end of the 5th year because average annual
replacement cost is least after 5 years which is Rs.2700/-.
Problem 3

Activity:

A firm is considering replacing equipment whose first cost is 1920, whose scrap value is
negligible at the end of any year. Based on experience, it is found that maintenance cost is zero
during the first year, and it increases by Rs. 100 every year thereafter (if the interest rate is 0%).

Determine at which what age is a replacement due?

Solution:

Table 5 Solution (Problem 3)

Purchase Annual Cumulative Average

Years Price – Scrap Maintenance Maintenance Total Cost Total Cost
Value Cost Cost
1 1920 0 0 1920 1920
2 1920 100 100 2020 1010
3 1920 200 300 2220 740
4 1920 300 600 2520 630
5 1920 400 1000 2920 584
6 1920 500 1500 3420 570
7 1920 600 2100 4020 574
8 1920 700 2800 4720 590

Discussion:

So, the machine should be replaced at the end of the 6th year because average annual
replacement cost is least after 6 years which is Rs.570/-.

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