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Replacement analysis, defender vs challenger by AEC
Short answer
Replacement analysis compares equivalent annual costs of keeping an existing asset (defender) versus a new one (challenger) using current market value as investment base. For the given data at 10% MARR over 5 years, defender AEC = Rs 1,577,595 and challenger AEC = Rs 1,476,734. The challenger saves Rs 100,861 annually, so replace the defender.
What do you mean by replacement analysis? Determine the choice between defender and challenger with the following information from AEC approach when useful life is 5 years and MARR is 10%.
| Item | Defender | Challenger |
|---|---|---|
| Initial investment (Rs.) | 25,00,000 | 35,00,000 |
| Annual cost (Rs.) | 10,00,000 | 7,50,000 |
| Salvage value (Rs.) | 5,00,000 | 12,00,000 |
Replacement analysis
Replacement analysis is the economic study of whether an existing asset (the defender) should be kept or replaced now by a new asset (the challenger). It compares the equivalent annual costs of keeping the defender against the challenger over a common service period, using the defender's present market value, not its sunk book value, as its investment. Reasons include physical deterioration, obsolescence, inadequate capacity and changed requirements.
AEC comparison (N = 5 years, MARR = 10%)
Assume the defender's quoted 25,00,000 is its present market value (investment base). Factors: (A/P,10%,5) = 0.26380; (A/F,10%,5) = 0.16380.
AEC(defender) = 25,00,000(A/P,10%,5) − 5,00,000(A/F,10%,5) + 10,00,000
= 25,00,000(0.26380) − 5,00,000(0.16380) + 10,00,000
= 659,494 − 81,899 + 10,00,000 = Rs 1,577,595
AEC(challenger) = 35,00,000(A/P,10%,5) − 12,00,000(A/F,10%,5) + 7,50,000
= 923,291 − 196,557 + 7,50,000 = Rs 1,476,734
| Option | AEC (Rs) |
|---|---|
| Defender | 1,577,595 |
| Challenger | 1,476,734 |
The challenger costs about Rs 100,861 less per year.
Answer: Replace the defender with the challenger.
✓ Answer checked by Claude Opus 5.5 (high effort)
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