Replacement Analysis

Replacement analysis is carried out when there is a need to replace or augment the currently owned equipment (or any asset). There are various reasons that result in replacement of a given equipment. One of the reasons is the reduction in the productivity of currently owned equipment. This occurs due to physical deterioration of its different parts and there is decrease in operating efficiency with age. In addition to reduced productivity, there is also increase in operating and maintenance cost for the construction equipment due to physical deterioration. This necessitates the replacement of the existing one with the new alternative. Similarly if the production demands a change in the desired output from the equipment, then there is requirement of augmenting the existing equipment for meeting the required demand or replacing the equipment with the new one. Another reason for replacement of the existing equipment is obsolescence. Due to rapid change in the technology, the new model with latest technology is more productive than the currently owned equipment, although the currently owned equipment is still operational and functions acceptably. Thus continuing with the existing equipment may increase the production cost. The impact of rapid change in technology on productivity is more for the equipment with more automated facility than the equipment with lesser automation.

In replacement analysis, the existing (i.e. currently owned) asset is referred as defender whereas the new alternatives are referred as challengers. In this analysis the ‘outsider perspective' is taken to establish the first cost of the defender. This initial cost of the defender in replacement analysis is nothing but the estimated market value from perspective of a neutral party. In other words this cost is the investment amount which is assigned to the currently owned asset (i.e. defender) in the replacement analysis. The current market value represents the opportunity cost of keeping the defender i.e. if the