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Presented By: SONIA ROLL NO-78

WHAT IS REPLACEMENT THEORY?


The replacement problems are concerned with the situations that arise when some time such as machines, equipment's and electric bulbs etc. need replacement due to decreased efficiency, failure or breakdown. The problem of replacement is to decide best policy to determine an age at which the replacement is more economical instead of continuing at increased cost. What do we replace?

Machinery, Tools, Equipment, Inefficient/Dead Human resource.

TYPES OF FAILURE
Two types of failure
Gradual Failure : Tyres, Break shoes 2. Sudden Failure: Progressive Eg: Automobile Tubes Retrogressive Eg: Human skills and air craft engines Random Eg: Vaccum tubes, Electric Bulbs
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Progressive failure Retrogressive failure Probability of output Random failure

life

REPLACEMENT SITUATIONS
Due to failure of machine or expected to fail shortly Availability of new technology.

Why we do Replacement?
To minimize the maintenance cost To maximize the effective money utilization To increase efficiency

ASSUMPTIONS OF REPLACEMENT THEORY


Quality of output remain constant Replacement and maintenance cost remain constant. Operational efficiency of equipment remain constant. There is not any change in the tech of asset under consideration.

REPLACEMENTS OF ITEMS THAT FAILS


WITH TIME
When ignoring the changes in the value of money-The item should be replaced when the average annual cost to date becomes equal to the current maintenance cost. When considering the changes in the value of money(a) The machine should be replaced if the next periods cost is greater than the weighted average of previous cost. (b) The machine should not be replaced if the next periods cost is less than the weighted average of previous costs.

WHAT IS INVOLVED IN CALCULATION?


Y C S R R C-S TC
ATC

Year Purchasing Cost Scrap value

Maintenance Cost
Cum. Maintains cost Depreciation Total cost Average Total cost
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Year 9 Cost C Scrap Value S 8 7 6 5 4 2


Depreciation

Cumulative Running cost

WHAT IS INVOLVED IN CALCULATION?

Average total cost ATC

3 Running cost
R

Total cost
TC

Y R (CS)

WHAT IS INVOLVED IN CALCULATION?


Cumulative Running cost Depreciation

Maintenance value R 11 (CS)

Year

Cost

Running cost

Scrap Value

Total cost

Y 1 2

C 10 10

S 4 3

TC

Average total cost

ATC
Cost-Scrap=Maintainance cost

5 6

3
4 5 6 7 8 9

Cummulaive mantenance cost is sum of the two consecutive R values

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WHAT IS INVOLVED IN CALCULATION?


Cumulative Running cost Depreciation

Cost-Scrap value=Depreciation cost Running cost Scrap Value

Year

Cost

Total cost

Y 1 2

C 10 10

S 4 3

R 11

(CS) 7

TC

Average total cost

ATC
Cost-Scrap=Maintainance cost

5 6

3
4 5 6 7 8 9

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TOTAL COST FORMULA

Total

cost=[ Rn + (C-S)]

=Maintainance cost+Depreciation

Average

Total Cost =[ Rn + (C-S)]/Y

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WHAT IS
Year Cost Y 1 2 C 10 10

Cumulative Running cost

Depreciation

Running cost

Scrap Value

Total cost

Average total cost

Total cost=Cumm. Maintenance cost+ INVOLVED IN CALCULATION depreciation R S R (CTC S)

ATC
Cost-Scrap=Maintainance cost

4 3

5 6

11

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3
4 5 6 7 8 9

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WHAT IS INVOLVED IN CALCULATION?


Cumulative Running cost Depreciation

Average total cost=TC/Year


Average total cost AVC
Cost-Scrap=Maintainance cost

Year

Cost

Running cost

Scrap Value

Y 1 2

C 10 10

S 4 3

R 11

(CS) 7

Total cost

TC

5 6

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3
4 5 6 7 8 9

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EXAMPLE: SOLVE IT!!!!

The cost of a machine is Rs. 6100/- and its scrap value is Rs. 100/- The maintenance costs found from experience are as follows:
1 100 2 250 3 400 4 600 5 900 6 1200 7 1600 8 2000

years Maintenance cost

When should the machine be replaced? Solution: let it is profitable to replace the machiney after n years. N is determined by average of tc

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Years

Purchase price-scrap value 6000 6000 6000 6000 6000 6000 6000 6000

Annual maint. cost 100 250 400 600 900 1200 1600 2000

Cum. MC

Total Cost 6100 6350 6750 7350 8250 9450 11050 13050

Avg. annual cost 6100 3175 2250 1837.50 1650 1575 1578 1631

1 2 3 4 5 6 7 8

100 350 750 1350 2250 3450 5050 7050

The avg. annual cost is minimum Rs. should be replaced after 6 years of use. (1575/-)

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GRAPH PLOTED FOR TC; R AND S.

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QUES 2

A machine owner finds from his past records that the costs per year of maintaining a machine whose purchase price is Ks. 6000 are as given below:

Determine at what age is a replacement due?

Ans. Capital cost C = 6000/-. Let it be profitable to replace the. machine after n years. Then n should be determined by the minimum value of Tav
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SOLUTION

We observe from the table that avg. annual cost is minimum (Rs. 2700/-). Hence the m/c should replace at the end of 5th year.

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Type B. Replacement of items whose maintenance costs increase with time and value of money also changes with time. The machine should be replaced if the next periods cost is greater than weighted average of previous cost. Discount rate [Present worth factor (PWF)

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QUES 3

Purchase price of a machine is Rs. 3000/ and its running cost is given in the table below. If should be replaced. the discount rate is 0.90. Find at what age the machine

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SOLUTION V (DISCOUNT RATE) = 0.90

M/c should be replaced at the end of 5th year.

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II:

REPLACEMENT OF ITEMS

WHICH FAIL COMPLETELY

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II:

REPLACEMENT OF ITEMS WHICH FAIL

COMPLETELY

Types of replacement
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Individual replacement- Item is replaced after its failure. Eg: Machine tools, Bus, Planes Group replacement Decision to be taken when the items are to be replaced irrespective of the fact that items have failed or not. Eg: Light bulbs, radio tubes

2.

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Group replacement is concerned with those items that either work or fail completely. It often happens that a system contains a large no. of identical low cost items that are increasingly liable to failure with age When the value of individual items is so small that cost of keeping records of individual ages cannot be justified. It may be advantageous to replace all items at fixed intervals. Such a policy is called Group replacement. Individual replacement: Under this policy an item is replaced immediately after its failure Group replacement: Under this policy, decision is taken as to when all the items must be replaced irrespective of the fact that the item has failed or have not failed, with the provision of that an item fails before optimal time, it may be replaced individually

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III: OTHER REPLACEMENT PROBLEMS


Replacement policy for items whose maintenance cost increases with time and money value is not constant Recruitment and promotion problems of employees Equipment renewal problem

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THANK YOU
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