--- title: "Reasons for replacement; strategy from AEC table" subject: "Engineering Economics" chapter: 5 key: "semester_6/engineering_economics:reasons-replacement-aec-table-12" source: https://www.bctengineer.com/q/semester_6/engineering_economics/reasons-replacement-aec-table-12 site: BCT Engineering --- # Reasons for replacement; strategy from AEC table Engineering Economics · Chapter 5: Replacement Analysis - Asked in: 2070 Bhadra, 4+8 marks - Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14 - Page: https://www.bctengineer.com/q/semester_6/engineering_economics/reasons-replacement-aec-table-12 - Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-5 ## Question Explain about the reasons for replacement of asset. The Annual Equivalent Cost (AEC) of the defender and challenger are given in the table below. What is the best replacement strategy? Use MARR = 12%. The planning horizon of the project is 8 years. | End of Year (n) | 1 | 2 | 3 | 4 | 5 | 6 | |---|---|---|---|---|---|---| | (AEC)D | 5300 | 5250 | 5400 | 5750 | 6200 | 6550 | | (AEC)C | 7700 | 6150 | 5700 | 5600 | 5675 | 5800 | ## Short answer Replacement reasons include physical deterioration, obsolescence, inadequacy, changed requirements, and financial factors. With AECs at 12% MARR, defender ESL=2 years (AEC 5,250), challenger ESL=4 years (5,600). Best strategy: use defender for 3 years, then challenger for 5 years, PW Rs 27,531 (annualized Rs 5,542). ## Answer #### Reasons for replacement of an asset - **Physical deterioration:** wear raises repair, maintenance and downtime costs and cuts efficiency. - **Obsolescence:** newer technology gives the same output at lower cost or with better quality. - **Inadequacy:** the old asset can no longer meet the required capacity or demand. - **Changed requirements:** new laws, safety rules, or a change in the product. - **Financial reasons:** lease-versus-buy, tax advantages, or the high resale value of the old asset now. #### Replacement strategy (MARR = 12%, 8-year horizon) Economic service lives from the table: defender minimum AEC = 5,250 at n = 2; challenger minimum AEC = 5,600 at n = 4. Because the planning horizon (8 years) is finite and the tables stop at 6 years, each plan is "defender for n years, then challenger(s) for the remaining years". PW = AEC_D(n)(P/A,12%,n) + AEC_C(m)(P/A,12%,m)(P/F,12%,n) Example, defender 3 years then challenger for 5 years: ```text PW = 5,400(P/A,12%,3) + 5,675(P/A,12%,5)(P/F,12%,3) = 5,400(2.4018) + 5,675(3.6048)(0.7118) = 12,970 + 14,562 = 27,531 ``` | Defender kept | Then challenger(s) for | PW of cost | Equivalent AEC (8 yr) | |---|---|---|---| | Defender 3 yr | 5 yr | 27,531 | 5,542 | | Defender 2 yr | 3 + 3 yr | 27,555 | 5,547 | | Defender 1 yr | 4 + 3 yr | 27,687 | 5,574 | | Challenger only | 4 + 4 yr | 27,819 | 5,600 | | Defender 4 yr | 4 yr | 28,274 | 5,692 | | Defender 5 yr | 3 yr | 30,118 | 6,063 | | Defender 6 yr | 2 yr | 32,196 | 6,481 | The minimum PW is Rs 27,531 (about Rs 5,542 per year). The next plan, defender 2 years then challenger 3 + 3, is only 24 higher, so the two plans are practically equal. **Answer:** Keep the defender for **3 years**, then replace it with the challenger and keep the challenger for the remaining 5 years. (Replacing after its 2-year economic life is almost as good.) ## Check yourself The answer's key points as multiple-choice questions, with the correct option and why. 1. What does obsolescence as a reason for replacement mean? A. Wear and tear raises maintenance B. A new asset gives the same output at lower cost or better quality C. Capacity is insufficient D. New laws apply Answer: B. Obsolescence arises from newer technology; the others are physical deterioration, inadequacy and changed requirements. (Key point: Obsolescence) 2. How is the PW of 'defender n years then challenger m years' computed? A. AEC_D(n)(P/A,12%,n) + AEC_C(m)(P/A,12%,m)(P/F,12%,n) B. AEC_D(n) + AEC_C(m) C. AEC_D(n)(F/A) + AEC_C(m) D. AEC_D(n)(P/A,12%,m) + AEC_C(m)(P/A,12%,n) Answer: A. Each segment's AEC is converted to PW over its own years, and the later segment is discounted back by (P/F,12%,n). (Key point: Plan PW formula) 3. Which strategy has the minimum PW (27,531)? A. Defender 2 years then challengers B. Challenger only for 4 + 4 years C. Defender 3 years then challenger for 5 years D. Defender 5 years then challenger 3 years Answer: C. Keeping the defender 3 years then the challenger 5 years gives the lowest PW, only slightly below the 2-year plan. (Key point: Best strategy) 4. Why does the defender's lower minimum AEC (5,250 vs 5,600) matter? A. It means the challenger must be bought now B. It shows the defender should be kept at least until its economic life C. It fixes the MARR D. It removes the need for PW comparison Answer: B. The defender is cheaper per year at its ESL, so keep it initially, though the finite horizon still needs a full PW comparison. (Key point: Role of ESL) ## Close variants set in other exams - [Sunk cost, ESL, replacement strategy from AEC table](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Asunk-cost-esl-replacement-aec-table) — Engineering Economics, chapter 5, asked 2× ## Related in Engineering Economics - [Replacement analysis, defender vs challenger by AEC](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Areplacement-analysis-defender-challenger-aec) — Engineering Economics, chapter 5 - [Replacement strategy for four-year need](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Areplace-machine-aec-four-years) — Engineering Economics, chapter 5 - [Defender, challenger, ESL of router](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Adefender-challenger-esl-router) — Engineering Economics, chapter 5 - [ESL and replacement strategy for printing machines](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Aprinting-machine-old-new-aec-esl) — Engineering Economics, chapter 5