Difference between challenger and defender in replacement studies
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Replacement analysis is concerned with the question, when is it time to replace an existing piece of equipment with a new one? The answer to this is not necessarily ``When the old one wears out.'' It is possible, after all, to keep a 1957 Chevy running up to the present day, if you're prepared to spend enough time and money on it. Conversely, it may be worth replacing an IBM XT with a Pentium well before the former breaks down.
We therefore distinguish between thephysical life of an asset and itseconomic life. The physical life will sometimes be well-defined, though in some cases, like the 1957 Chevy, we have to set an arbitrary limit on how long we're prepared to keep an obsolete asset in service. The economic life is the time after which we save money by replacing the asset. Thus, the physical life is always greater than or equal to the economic life.
The most effective way to think about the replacement interval is to consider the equivalent uniform annual cost of the asset over its life, taking various different durations for its life. The EUAC is usually made up of two factors: the initial cost of the asset, spread out over its life (the `capital recovery' annuity); and the annual cost of repairs and maintenance. The capital recovery should include a deduction for the salvage value of the asset, if any. The annual cost of repairs should, if appropriate, include a contribution representing the cost of correcting any defects in the product resulting from the use of an outmoded machine.
The first factor will go down as we consider longer lifetimes, while the second will usually go up. The sum of the two will therefore (usually) have a minimum value. This minimum value is the minimum EUAC, and in most cases this will correspond to the economic life of the asset.
In many cases, we consider replacing an existing asset (the `defender') with another asset (the `challenger'). The simplest case, however, occurs when we are considering getting rid of an asset and not replacing it. Examples might include a video game machine at a corner store, or a piece of equipment that allows a company to service a particular small section of their customer base -- for example, a machine for processing Cibachrome film at a photo shop. In this simplest case, we calculate the present worth of the asset and the cash flows associated with it for a range of possible lifetimes. If any of these present worths are positive, we should retain the asset; otherwise we should get rid of it.
A more commonly occurring case is that in which we plan to replace the asset with another, identical asset.
We therefore distinguish between thephysical life of an asset and itseconomic life. The physical life will sometimes be well-defined, though in some cases, like the 1957 Chevy, we have to set an arbitrary limit on how long we're prepared to keep an obsolete asset in service. The economic life is the time after which we save money by replacing the asset. Thus, the physical life is always greater than or equal to the economic life.
The most effective way to think about the replacement interval is to consider the equivalent uniform annual cost of the asset over its life, taking various different durations for its life. The EUAC is usually made up of two factors: the initial cost of the asset, spread out over its life (the `capital recovery' annuity); and the annual cost of repairs and maintenance. The capital recovery should include a deduction for the salvage value of the asset, if any. The annual cost of repairs should, if appropriate, include a contribution representing the cost of correcting any defects in the product resulting from the use of an outmoded machine.
The first factor will go down as we consider longer lifetimes, while the second will usually go up. The sum of the two will therefore (usually) have a minimum value. This minimum value is the minimum EUAC, and in most cases this will correspond to the economic life of the asset.
In many cases, we consider replacing an existing asset (the `defender') with another asset (the `challenger'). The simplest case, however, occurs when we are considering getting rid of an asset and not replacing it. Examples might include a video game machine at a corner store, or a piece of equipment that allows a company to service a particular small section of their customer base -- for example, a machine for processing Cibachrome film at a photo shop. In this simplest case, we calculate the present worth of the asset and the cash flows associated with it for a range of possible lifetimes. If any of these present worths are positive, we should retain the asset; otherwise we should get rid of it.
A more commonly occurring case is that in which we plan to replace the asset with another, identical asset.
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Challenger and defender in replacement studies:
- In replacement studies, if existing equipment is measured for replacement with new equipment, at that time the existing equipment is identified as the defender, and the new equipment is identified as a challenger.
- Replacement analysis is one of the vital analyses in resource budgeting. An asset life may be condensed due to physical impairment, changes in economic supplies, and rapid changes in technology that may obsolete assets prior to anticipation.
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