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    Replacement Analysis: by Group I

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    55MESuman saha
    Group I analyzed the replacement of assets using various techniques. They defined replacement analysis as evaluating whether to keep the current asset or replace it with a new one. The analysis considers minimum cost, life of new assets, and marginal cost. The group developed a replacement decision map to determine when an asset should be replaced based on whether defender costs are increasing or decreasing. The optimal time is when the challenger has the lowest equivalent annual cost. Proper replacement analysis balances costs of keeping older assets with costs of frequent replacement.

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    Replacement Analysis: by Group I

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    55MESuman saha
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    Group I analyzed the replacement of assets using various techniques. They defined replacement analysis as evaluating whether to keep the current asset or replace it with a new one. The analysis considers minimum cost, life of new assets, and marginal cost. The group developed a replacement decision map to determine when an asset should be replaced based on whether defender costs are increasing or decreasing. The optimal time is when the challenger has the lowest equivalent annual cost. Proper replacement analysis balances costs of keeping older assets with costs of frequent replacement.

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    Group I analyzed the replacement of assets using various techniques. They defined replacement analysis as evaluating whether to keep the current asset or replace it with a new one. The analysis considers minimum cost, life of new assets, and marginal cost. The group developed a replacement decision map to determine when an asset should be replaced based on whether defender costs are increasing or decreasing. The optimal time is when the challenger has the lowest equivalent annual cost. Proper replacement analysis balances costs of keeping older assets with costs of frequent replacement.

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    13 views18 pages

    Replacement Analysis: by Group I

    Uploaded by

    55MESuman saha
    Group I analyzed the replacement of assets using various techniques. They defined replacement analysis as evaluating whether to keep the current asset or replace it with a new one. The analysis considers minimum cost, life of new assets, and marginal cost. The group developed a replacement decision map to determine when an asset should be replaced based on whether defender costs are increasing or decreasing. The optimal time is when the challenger has the lowest equivalent annual cost. Proper replacement analysis balances costs of keeping older assets with costs of frequent replacement.

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    of 18

    Replacement Analysis

    by Group I
    Group Member: Department- Mechanical
    Swarnava Bhunia- 35000720054 Engineering
    Suman Saha- 35000720055 Year- 4th year
    Rajibul Islam- 35000720056 Subject- Economics for Engineers
    Anup Das- 35000720057 Subject Code- HM-HU701
    Tapanendu Giri- 35000720058
    Contents
    • Concept and Definition of Replacement Analysis
    • Replacement Analysis Decision Map
    • Minimum Cost
    • Life of a New Asset
    • Marginal Cost
    • Conclusion
    Concept and Definition of Replacement
    Analysis
    • Definition: Replacement analysis is one of the crucial analysis in capital budgeting.
    An asset life may be reduced due to physical impairment, changes in economic
    requirements and rapid changes in technology that may obsolete an assets prior to
    expectation. The replacement of assets offer economic opportunity for the firm. In
    replacement analysis there is two alternatives:
    • The assets that are currently using : The defender
    • The assets that we have to buy to replace current assets : The challenger
    Classic Economic Life Conflicts
    Factors to be Considered
    • Sunk costs to be ignored
    • Existing asset value need not be considered
    • Income tax to be avoided
    • The optimal replacement cycle is one which has lowest equivalent annual cost
    • The replacement decision will apply indefinitely.
    • Economic life of the challenger and the defender should not consider
    What Is Marginal Cost?
    • Definition: In economics, the marginal cost is
    the change in total production cost that comes
    from making or producing one additional unit.
    To calculate marginal cost, divide the change
    in production costs by the change in quantity.
    The purpose of analyzing marginal cost is to
    determine at what point an organization can
    achieve economics on scale to optimize
    production and overall operations. If the
    marginal cost of producing one additional unit
    is lower than the per-unit price, the producer
    has the potential to gain a profit.
    Marginal Cost
    • Marginal cost is an important concept in managerial accounting, as it can help an organization
    optimize its production through economies of scale.
    • A company can maximize its profits by producing to where marginal cost (MC) equals marginal
    revenue (MR).
    • Fixed costs are constant regardless of production levels, so higher production leads to a lower fixed
    cost per unit as the total is allocated over more units.
    • Variable costs change based on production levels, so producing more units will add more variable
    costs.
    • Companies must be mindful of when increasing production necessitates results in step costs due to
    changes in relevant ranges (i.e. additional machinery or storage space needed).
    Marginal Cost
    • Formula: Marginal cost is calculated as the total expenses required to manufacture one additional
    good. Therefore, it can be measured by changes to what expenses are incurred for any given
    additional unit.

    Marginal Cost = Change in Total Expenses / Change in Quantity of


    Units Produced
    Benefits of Marginal Cost
    • It can concentrate resources towards items where the difference is the greatest.
    • Instead of investing in minimally successful goods, it can focus on making individual units that
    maximum returns.
    • Marginal cost is also essential in knowing when it is no longer profitable to manufacture additional
    goods.
    What is Tangible Asset?
    • A tangible asset is any asset in physical form.
    Tangible assets include fixed asset such as
    machinery, land, and buildings. Tangible assets
    can also be current assets, such as inventory.
    • Any tangible asset has a useful life of more
    than one year.
    • Factors involved in determining the useful life
    of a tangible asset include the age of the asset
    when purchased, how frequently the asset is
    used, and the environmental conditions of the
    business that purchased the asset.
    Tangible Asset
    • Tangible assets include fixed and current assets.
    • Any asset has a useful life of more than one year.
    • The useful life of an asset include the age of the asset, frequency of use, and business
    environmental conditions.
    • The IRS provides guidelines for estimating the useful lifespans of assets and the period over which
    depreciation of the asset may occur.
    Useful Life of a Tangible Asset
    • The useful life of an asset is an estimation of the
    length of time the asset can reasonably be used to
    generate income and be of benefit to the company.
    • Useful life does not refer to the length of time the
    asset will last.
    • The useful life of identical assets varies by user, and
    that life depends on the asset's age, frequency of use,
    condition of the business environment, and repair
    policy.
    • Additional factors that affect an asset's useful life
    include anticipated technological improvements,
    changes in laws, and economic changes.
    Techniques of Decision map
    • 1 of the challenger
    Assuming: • if defender is retained, replace it with the challenger
    • best challenger will continue to be available in all later when the marginal cost becomes > the min. EACF of the
    years challenger
    • the period of needed services is infinite • 3
    Defender marginal costs are increasing: When we don’t know the marginal cost of defender:
    • Retain defending if marginal cost for next year is less • compare EACF of the defender over its remaining
    than min. EACF of the challenger useful life against the minimum EACF of the challenger
    • Else, replace • replace if defender EACF < challenger EACF

    • 2
    Defender marginal costs are decreasing (early on in its
    useful life):
    • retain if: marginal EACF of defender < minimum EACF
    Replacement Analysis Decision Chart
    Conclusion
    A business needs to know how often to replace such assets. Replacing
    after a long time means not replacing as often, so delaying the cost of a new
    replacement machine. However this invariably means keeping an asset
    whose value is declining and which costs more to maintain. These costs and
    benefits need to be balanced.
    Reference
    • https://accountantskills.com/replacement-analysis-worked-example-limitations/
    • https://www.investopedia.com/terms/m/marginalcostofproduction.asp#:~:text=Investo
    pedia%20/%20Madelyn%20Goodnight-,What%20Is%20Marginal%20Cost%3F,by%2
    0the%20change%20in%20quantity
    • https://www.investopedia.com/ask/answers/051215/how-do-you-determine-tangible-a
    ssets-useful-life.asp#:~:text=Any%20asset%20has%20a%20useful,of%20the%20asse
    t%20may%20occur
    • https://www.shopify.com/blog/what-is-marginal-cost#:~:text=Marginal%20cost%20is
    %20the%20increase,at%20a%20break%2Deven%20point
    • https://www.muchen.ca/documents/MECH431/Lesson%2020.html
    • https://www.wallstreetmojo.com/tangible-assets/
    • https://www.economicsonline.co.uk/definitions/marginal_cost.html/
    Thank You

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