Op eratio n Research

Repla ceme nt Anal ysi s

Model

By
Meghant Nichant
Industrial Engineer (IE)
Why Replacement Analysis ?

Eff iciency of machine

reduces w ith TI ME !

Results………

Increases the cost of maintenance..

Entire system gets disturbed..

 Replacement of Items that deteriorate I.e.
whose maintenance cost increase with time..!

 C – Capital Cost or Purchase Price of the item.

 S – Scrap Value of the Item.
 Y – Year of services.
 AMC – Annual maintenance cost.
 CMC – Cumulative maintenance cost.
 TC – Total cost.
 Avg.C – Average annual cost
 Formula !
 C – Capital Cost or Purchase Price of the item (c-s).
 ( C – S ) : Purchase price – scrape value.
 S – Scrap Value of the Item.
 Y – Year of services (n).
 AMC – Annual maintenance cost.
 CMC – Cumulative maintenance cost.
 TC – Total cost.
 Avg.C – Average annual cost

TC = Capital Cost + Cumulative Maint. Cost

Avg.C = TC / Year of services
 Examples - 1
The cost of the M/c X was Rs. 6,100 and its
scrap value is 100. The maintenance cost
found from experience are as follows.
Year – 1 2 3 4 5 6 7 8
MC – 100 250 400 600 900 1200 1600 2000

When Should the m/c X be replaced ?

 Solution
Year of service
Purchase price - scrap
Annualvalue
Maintenance
Cumulative
cost maintenance
Total
costCost Avg. Annual Cost

1 6000 100 100 6100 6100

2 6000 250 350 6350 3175
3 6000 400 750 6750 2250
4 6000 600 1350 7350 1837
5 6000 900 2250 8250 1650
6 6000 1200 3450 9450 1575
7 6000 1600 5050 11050 1578
8 6000 2000 7050 13050 1631
 Replacement Year ?
In the Sixth Year Avg. Annual
Cost is minimum I.e. 1575 Rs.
Hence M/c X should be replaced
at the end of 6 th Year..
 Example - 2
 A private transport bus owner find from his records the
following running cost and resale value during a period
of 8 years. Find at what stage the replacement was due
if the purchase price was Rs. 8,00,000.

Year 1 2 3 4 5 6 7 8

1.3
nning Cost in Lacs. 1.5 1.8 2.3 2.9 3.7 4.8 5.8

4.0
sale Value in Lacs. 3.5 2.8 2.5 2.0 1.5 1.0 0.5
 When should M/c be replaced ?

ar of service
Running Cost
Cum. Running Cost
Resale Value
C - RV C – RV + CRCAvg. Cost
RC CRC RV

1 1,30,000 1,30,000 4,00,000 4,00,000 5,30,000 5,30,000

2 1,50,000 2,80,000 3,50,000 4,50,000 7,30,000 3,65,000
3 1,80,000 4,60,000 2,80,000 5,20,000 9,80,000 3,26,667
4 2,30,000 6,90,000 2,50,000 5,50,000 12,40,000 3,10,000
5 2,90,000 9,80,000 2,00,000 6,00,000 15,80,000 3,16,000
6 3,70,000 13,50,000 1,50,000 6,50,000 20,00,000 3,33,334
7 4,80,000 18,30,000 1,00,000 7,00,000 25,30,000 3,61,429
8 5,80,000 24,10,000 50,000 7,50,000 31,60,000 3,95,000
 Replacement Year ?
Here, The Avg. Cost In The 4 th
Year Is Rs. 3,10,000 Only and
It’s Minimum..
Therefore the Transport Bus
should be replaced at the end of
4 th Year.
 Example - 3
 Purchase Price of Electronic office equipment =
Rs. 52,000.
 Installation Charges = Rs. 14,400.
 Scrap Value = Rs. 6,400

Maintenance Cost is given below.

 Year- 1 2 3 4 5 6 7 8
 MC- 1000 3000 4000 6000 8400 11600 16000 19200
Optimum replacement period ?

 Here the cost of Equipment

=
Purchase price + Installation Charges
52,000 + 14,000
= Rs. 66,400 &
 Scrap / Resale Value = Rs. 6,400.
 Optimum Replacement Period
Year Pur.price - resaleAnnual
value Main.Cumm.
Cost Maint. Cost
Total cost Avg. annual Cost

1 60,000 1,000 1000 61000 61000

2 60,000 3,000 4000 64000 32000
3 60,000 4,000 8000 68000 22667
4 60,000 6,000 14000 74000 18500
5 60,000 8,400 22400 82400 16480
6 60,000 11,600 34000 94000 15667
7 60,000 16,000 50000 110000 15714
8 60,000 19,200 69200 129200 16150
 Example - 4
 M/c PQR cost – Rs. 9,000
Annual Operating cost are Rs. 200 For first Year, &
then increase by Rs. 2,000 every year.
Determine the best age at which to replace the m/c ?
Assume that m/c has No resale value when replaced and
that future cost are not discounted.
 M/c XYZ cost – Rs. 10,000
Annual operating cost Rs. 400 for the first year &
increase by 800 every year.
 Determine the optimum replacement period
for both m/c.
 First we computed the average
annual cost for m/c PQR !

Year Pur.price- resale

Annual
valueMain.
Cumm.
Cost Maint. Cost
Total costAvg. annual Cost

1 9,000 200 200 9200 9200

2 9,000 2200 2400 11400 5700

3 9,000 4,200 6600 15600 5200

4 9,000 6,200 12800 21800 5450

5 9,000 8,200 21000 30000 6000

 Now we computed the average
annual cost for m/c XYZ !

Year Pur.price- resaleAnnual

value Main.Cumm.
Cost Maint. Cost
Total cost Avg. annual Cost

1 10,000 400 400 10400 10400

2 10,000 1200 1600 11600 5800

3 10,000 2000 3600 13600 4533.33

4 10,000 2800 6400 16400 4100

5 10,000 3600 10000 20000 4000

6 10,000 4400 14400 24400 4066.67

 Replacement Year ?
 Here, The Avg. Cost of M/C PQR In
The 3 rd Year Is Rs. 5,200 Only and
It’s Minimum.. &
 The Avg. Cost of M/C XYZ In The 5
th Year Is Rs. 4,000 Only and It’s
Minimum..
Both M/c’s should be replaced by said
years…!
 Ex 5 - Find the optimum
replacement age of the
equipment ?
Purchase Price is Rs. 50,000
Operating Cost are : Rs. 8000 for 1st year
and increase by Rs. 4000 every year.
Resale value was Rs. 25,000 for 1st Year
and decrease by 4000 every year.
 When should M/c be replaced ?

ar of service
Operating Cost
Cum. Operating Cost
Resale Value
C - RV C – RV + COCAvg. Cost
OC COC RV

1 8000 8000 25000 25000 33000 33000

2 12000 20000 21000 29000 59000 29500
3 16000 36000 17000 33000 69000 23000
4 20000 56000 13000 27000 83000 20750
5 24000 80000 9000 41000 121000 24200
6 28000 108000 5000 45000 153000 25500
7 32000 140000 1000 49000 189000 27000
Thanking You..