Replacement studies

Construction Engineering 221

Economic Analysis
 Replacement Studies
• Opportunity costs is a conceptual term
referring to the foregone returns of an
investment not pursued, or what you will
“lose” by not doing anything
• Opportunity costs are most often
representing in engineering economics
problems as the cash flows forfeited by not
selling (replacing) an asset before its
useful life is up
 Replacement Studies
• When examining whether to continue
using (economically) an existing process
or product (equipment), the calculation is
called a replacement study
• Any of the basic methods will work for
comparison, but the annual cost method is
most common
• Existing equipment is sometimes called
the defender and the new is the challenger
 Replacement Studies
• Salvage in replacement studies is an estimate of
future value (F)
• Treat salvage as an opportunity cost- not as a
“trade-in” cost (keep defender costs and values
together, and separate from the challenger costs
and values)
• Convention is to use present value if lives are
equal and annualized cost if lives are different
because discount of F will vary based on
number of terms
 Replacement Studies
• Economic life- when the cost to keep an
asset (O & M) exceeds the value
(revenue) it can produce.
• Cost to keep is sum of amortized initial
cost (decrease with time) PLUS the
operating cost (increase with time)
• Summation of amortization and operation
produces a U-shaped curve
 Replacement Studies
• Economic life calculation
operation

amortization

time

time Economic life

 Replacement Studies
• Example 16 on page 39 is a good
illustration of replacement scheduling
calculations
• Replacement schedules are only as good
as the data/ estimates used to calculate
operation costs and economic life.