Equipment Life and

Replacement

Mansoor Azam Qureshi

NUST
 Equipment Life

 Physical Life

 Profit Life

 Economic Life

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 Physical Life

 Machine is worn out and can no longer reliably produce

and is abandoned or scrapped. Maintenance and
operating costs increase with life.
 Operating costs rise are affected by the care it receives
while in use, the nature of the job it is doing, and the
quality of the maintenance it receives.

 Small regular expenditure for preventive maintenance

abrogates the need for a large cost of components
replacement
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 Profit Life

 The life over which the equipment can earn a

profit.
 The retention beyond that point will create
an operating loss.
 Costly repairs exacerbate profit life.
 Major components wear out and need to be
replaced.
 Replace machine while major components
are still functional.
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 Economic Life

 Period that maximizes profits over the

equipment’s life.
 Optimizing production while maximizing
profit.
 Equipment replacement prevents an erosion
of profitability by the increased cost of
maintenance and operation as the equipment
ages beyond its economic life.

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 Replacement Analysis

 Analysis to replace equipment that has

reached its useful life.
 Cost to considered for replacement analysis
 Ownership costs
 Operating costs
 Inflation
 Downtime
 Obsolescence costs

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 Investment Cost

Investment cost assumed is 15%

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 Depreciation
Replacement Costs

Replacement cost includes inflation in prices

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 Maintenance and Repair Cost
 Maintenance and repair
costs are the crux of the
equipment replacement
decision
 Include the cost of labor ,
parts used to maintain
and repair the given
piece of equipment.
 keep accurate records of
maintenance and repair
costs.
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 Affected by following
factors.
 Type of equipment
 Age of the equipment
 Operating conditions
 Operating skill of the
operator
 Daily care by the operator
 Maintenance department
 Frequency and level of
preventive maintenance.
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 Maintenance and Repair Cost

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 Downtime of Equipment
 The time when  The downtime cost
equipment does not includes
work due to repairs etc  The ownership cost
 Downtime increases as  operating cost
equipment usage  operator cost
increases.  productivity loss caused
by the loss of equipment
availability

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 Downtime Cost

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 Obsolescence Cost
 Obsolescence is the reduction in value and marketability due to the
competition between newer and more productive models
 Obsolescence can be subdivided into two types:
 technological
 market preference.
 Technological obsolescence can be measured in terms of productivity.
Over the short term, technological obsolescence has typically occurred at
a fairly constant rate.
 Market preference obsolescence occurs as a function of customers’ taste.
 This is much less predictable, although just as real, in terms of lost value.
 The market preference obsolescence is not considered due to the
difficulty in quantifying its value.

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 Obsolescence Cost

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 Total Costs Per Hour

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 Replacement Decision

Cost per Hour

8 Total Cost
7
6 Ownership Cost
5
Cost

4
3
2 Operating Cost
1
0
1 2 3 4 5 6 7 8

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 Profit and Life of Equipment

Yearly Profit
0.5
Economic Life
0.4
0.38

0.3 0.31
0.28

0.2
0.17

0.1 0.1

0
1 2 3 4 5 6 7 8
-0.06

Profit Life
-0.25

-0.32
Physical Life

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