“ “ Construction Equipment Construction Equipment Replacement Model” Replacement Model” By By Anil H. Kulkarni Anil H. Kulkarni Under the guidance of Under the guidance of Prof. Dr. S. R. Sathe Prof. Dr. S. R. Sathe Seminar Seminar On On Pune Institute of Engineering and Pune Institute of Engineering and Technology Pune Technology Pune (Formerly Govt. College of Engineering Pune – 5) (Formerly Govt. College of Engineering Pune – 5)
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““Construction Equipment Replacement Construction Equipment Replacement Model”Model”
ByBy
Anil H. KulkarniAnil H. Kulkarni
Under the guidance of Under the guidance of
Prof. Dr. S. R. SatheProf. Dr. S. R. Sathe
Seminar Seminar
OnOn
Pune Institute of Engineering and Technology PunePune Institute of Engineering and Technology Pune(Formerly Govt. College of Engineering Pune – 5)(Formerly Govt. College of Engineering Pune – 5)
Contents
• Economic Life ProblemEconomic Life Problem• Replacement ModelReplacement Model• Consequential Cost EquationsConsequential Cost Equations• Case studyCase study• ConclusionConclusion• References References
Solution for Economic Life Problem
Minimizing costs– Comparison of alternatives with equal income
Prof
it
Maximum Profit Life
Economic Life = Maximum profit life
Infinite Horizon Model• Model aims at estimating total cost for existing
equipment and replacement on current rupees basis
TC(N1, N2, N3,…… Nk ) = I0 + Σ [ ] –
+ + Σ [ ] – + + Σ [ ] –
TC= Total cost of series of machines at N* , It = Initial investment at ‘t’
And Otj = Operating and maintenance cost for the jth year (t = Purchase)
N1
j = 1
O0j
(1+i)j
S0N1
(1+i)N1
N2
j = 1
ON1j
(1+i)N1+j
SN1N2
(1+i)N1+N2
N3
j = 2
ON2jSN2N3
(1+i)N1+N2+j (1+i)N1+N2+N3
IN1
(1+i)N1
IN1+N2
(1+i)N1+N2
Economic Life of Equipment
-40.00
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
0 5 10 15 20 25
Mill
ions
Replacewment Age in Years
Cos
t in
Rs.
Total Cost CurveO & M costInvestment CostResale Value
Minimum Total Cost
Realistic Model for Equipment Replacement
• Minimum cost equipment replacement model• Based on present worth of discounted cash flow• Model projects expected future life cycle cost for existing
machine plus future replacement to infinite horizon and then discounts them back to present value
• The model considers all significant cost categories of present machine plus all of its future replacements to an infinite horizon
• Arithmetic and geometric gradients are used in order to forecast costs
Optimization function
Planning Horizon
N L L L L
TPC(N,L)
0
O & M
O & M
I(N+L) – S(N+L)
I(N+2L) – S(N+2L)
I(N+3L) – S(N+3L)
I(N) – S(N)
I(N+4L) – S(N+4L)
Planning Horizon
Alternative 1 Alternative 2 Alternative 3 Alternative 4
Optium Total Presnt Cost = 16923197.66 Rs.Existing Equipments Optimum Future Age = 2 YearsReplacement Equipment Life Cycle = 8 Years
Following Chart of the cost components shows the replacement decision is clearly obtained:
Chart: Showing Clear Behaviour of total present cost suggesting replacement at N =2 Years
The ERA Model analysis shows that the Future life of existing equipment will be 2 year and the Replacement life cycle of the future replacement equipments will be 8 years. The results are tabulated as below.
1 3 5
7 9 S1
S4
S7
S10
15000000.0
16000000.0
17000000.0
18000000.0
19000000.0
20000000.0
21000000.0
22000000.0
Cost in Rs.
L in Years
N in Years
Total Present Cost Vs Age
Optimum Total Present Cost is Seen At N = 2 and L = 8 Years
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11) Vorster Mike., “Four Keys To Control Owning And Operating Costs”, Journal Of Construction Equipment, Oct, 2003.
12) Vorster Mike., “How To Estimate Market Value”, Journal Of Construction Equipment, June, 2004.
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15) Vorster Mike., “six steps to demystify depreciation”, journal of construction equipment, December 2003.
16) Income Tax Rules 1962, Appendix I., Effective From The Assessment Year 2003.2004.17) Engineering Economics, By Blank.18) Purifoy.P.E., “Construction Planning And Methods”, Fifth Edition.