Chap5 engeco

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Replacement Models
and
Maintenance Analysis
Dr. M. S. Memon
Department of Industrial Engineering & Management
Mehran University of Engineering & Technology,
Jamshoro, Pakistan

• Organizations providing goods/services use several facilities like equipment
and machinery which are directly required in their operations.
• In addition to these facilities, there are several other items which are
necessary to facilitate the functioning of organizations.
• All such facilities should be continuously monitored for their efficient
functioning; otherwise, the quality of service will be poor. Besides the
quality of service of the facilities, the cost of their operation and
maintenance would increase with the passage of time.
• Hence, it is an absolute necessity to maintain the equipment in good
operating conditions with economical cost.
• Thus, we need an integrated approach to minimize the cost of maintenance.
In certain cases, the equipment will be obsolete over a period of time.
INTRODUCTION

• If a firm wants to be in the same business competitively, it has
to take decision on whether to replace the old equipment or to
retain it by taking the cost of maintenance and operation into
account.
• There are two basic reasons for considering the replacement of
an equipment—physical impairment of the various parts or
obsolescence of the equipment.
INTRODUCTION

• Sometimes, the capacity of existing facilities may be inadequate
to meet the current demand. Under such situation, the following
alternatives will be considered.
– Replacement of the existing equipment with a new one.
– Augmenting the existing one with an additional equipment.
INTRODUCTION

• Maintenance activity can be classified into two types:
preventive maintenance and breakdown maintenance.
– Preventive maintenance (PM) is the periodical inspection and service
activities which are aimed to detect potential failures and perform
minor adjustments or repairs which will prevent major operating
problems in future.
– Breakdown maintenance is the repair which is generally done after the
equipment has attained down state. It is often of an emergency nature
which will have associated penalty in terms of expediting cost of
maintenance and down time cost of equipment.
TYPES OF MAINTENANCE

• Preventive maintenance will reduce such cost up to a point. Beyond
that point, the cost of preventive maintenance will be more when
compared to the breakdown maintenance cost.
• The total cost, which is the sum of the preventive maintenance cost
and the breakdown maintenance cost, will go on decreasing with an
increase in the level of maintenance up to a point.
• Beyond that point, the total cost will start increasing.
• The level of maintenance corresponding to the minimum total cost
is the optimal level of maintenance.
• The concepts are demonstrated in Fig. 8.1.
TYPES OF MAINTENANCE

• Replacement study can be classified into two categories:
a) Replacement of assets that deteriorate with time (Replacement due to
gradual failure, or wear and tear of the components of the machines).
• This can be further classified into the following types:
i. Determination of economic life of an asset.
ii. Replacement of an existing asset with a new asset.
b) Simple probabilistic model for assets which fail completely
(replacement due to sudden failure).
TYPES OF REPLACEMENT PROBLEM

• Any asset will have the following cost components:
– Capital recovery cost (average first cost), computed from the first
cost (purchase price) of the machine.
– Average operating and maintenance cost (O & M cost)
– Total cost which is the sum of capital recovery cost (average first
cost) and average maintenance cost.
DETERMINATION OF ECONOMIC LIFE OF AN ASSET

• From Fig. it is clear that the capital recovery cost (average first
cost) goes on decreasing with the life of the machine and the
average operating and maintenance cost goes on increasing with the
life of the machine.
• From the beginning, the total cost continues to decrease up to a
particular life and then it starts increasing.
• The point where the total cost is minimum is called the economic
life of the machine.
• If the interest rate is more than zero per cent, then we use interest
formulas to determine the economic life.

• A firm is considering replacement of an equipment, whose first
cost is Rs. 4,000 and the scrap value is negligible at the end of
any year.
• Based on experience, it was found that the maintenance cost is
zero during the first year and it increases by Rs. 200 every year
thereafter.
a) When should the equipment be replaced if i = 0%?
b) When should the equipment be replaced if i = 12%?
EXAMPLE 8.1

• The following table gives the operation cost, maintenance cost and salvage value
at the end of every year of a machine whose purchase value is Rs. 20,000.
• Find the economic life of the machine assuming interest rate, i = 15%.
EXAMPLE 8.2

• In this section, the concept of comparison of replacement of an
existing asset with a new asset is presented.
• In this analysis, the annual equivalent cost of each alternative
should be computed first.
• Then the alternative which has the least cost should be selected
as the best alternative. Before discussing details, some
preliminary concepts which are essential for this type of
replacement analysis are presented.
REPLACEMENT OF EXISTING ASSET WITH A NEW ASSET

• If an existing equipment is considered for replacement with a new
equipment, then the existing equipment is known as the defender and the
new equipment is known as challenger.
• Assume that an equipment has been purchased about three years back for
Rs. 5,00,000 and it is considered for replacement with a new equipment.
The supplier of the new equipment will take the old one for some money,
say, Rs. 3,00,000.
• This should be treated as the present value of the existing Equipment and it
should be considered for all further economic analysis. The purchase value
of the existing equipment before three years is now known as sunk cost, and
it should not be considered for further analysis.
Concept of Challenger and Defender

• Two years ago, a machine was purchased at a cost of Rs.
2,00,000 to be useful for eight years. Its salvage value at the
end of its life is Rs. 25,000. The annual maintenance cost is Rs.
25,000. The market value of the present machine is Rs.
1,20,000. Now, a new machine to cater to the need of the
present machine is available at Rs. 1,50,000 to be useful for six
years. Its annual maintenance cost is Rs. 14,000. The salvage
value of the new machine is Rs. 20,000. Using an interest rate
of 12%, find whether it is worth replacing the present machine
with the new machine.
EXAMPLE 8.3

• The cash flow diagram of the present machine is illustrated in
Fig. 8.4. The annual maintenance cost for the preceding periods
are not shown in this figure.
EXAMPLE 8.3

• A diesel engine was installed 10 years ago at a cost of Rs. 50,000. It has a
present realizable market value of Rs. 15,000.
• If kept, it can be expected to last five years more, with operating and
maintenance cost of Rs. 14,000 per year and to have a salvage value of Rs.
8,000 at the end of the fifth year. This engine can be replaced with an
improved version costing Rs. 65,000 which has an expected life of 20
years.
• This improved version will have an estimated annual operating and
maintenance cost of Rs. 9,000 and ultimate salvage value of Rs. 13,000.
• Using an interest rate of 15%, make an annual equivalent cost analysis to
determine whether to keep or replace the old engine.
EXAMPLE 8.4

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