--- title: "Replacement analysis, defender vs challenger by AEC" subject: "Engineering Economics" chapter: 5 key: "semester_6/engineering_economics:replacement-analysis-defender-challenger-aec" source: https://www.bctengineer.com/q/semester_6/engineering_economics/replacement-analysis-defender-challenger-aec site: BCT Engineering --- # Replacement analysis, defender vs challenger by AEC Engineering Economics · Chapter 5: Replacement Analysis - Asked in: 2069 Poush - Video: [Defender and challenger Repalcement Analysis numerical Pokhara university Engineering economics ](https://www.youtube.com/watch?v=xFnHAgH1I38) — Nabin Gautam - Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14 - Page: https://www.bctengineer.com/q/semester_6/engineering_economics/replacement-analysis-defender-challenger-aec - Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-5 ## Question 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 | ## 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. ## Answer #### 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. ```text 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.** ## Check yourself The answer's key points as multiple-choice questions, with the correct option and why. 1. What is replacement analysis? A. Estimating depreciation of an asset B. Studying whether an existing asset should be kept or replaced now by a new one C. Buying two identical assets D. Computing tax Answer: B. It compares keeping the defender with replacing it by the challenger over a common service period. (Key point: Replacement analysis meaning) 2. Which formula gives AEC(challenger)? A. 35,00,000(A/F) - 12,00,000(A/P) + 7,50,000 B. 35,00,000(A/P,10%,5) + 12,00,000(A/F,10%,5) + 7,50,000 C. 35,00,000(A/P,10%,5) - 12,00,000(A/F,10%,5) + 7,50,000 D. 35,00,000 - 12,00,000 + 7,50,000 Answer: C. Capital recovery less salvage annuity plus annual cost: 923,291 - 196,557 + 750,000 = 1,476,734. (Key point: AEC with salvage) 3. AEC defender is Rs 1,577,595 and challenger Rs 1,476,734. What is the decision? A. Keep the defender B. Replace the defender with the challenger, saving about Rs 100,861 per year C. Cannot decide D. Buy both Answer: B. Both are cost alternatives, so the lower AEC wins: the challenger. 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