14. A construction company wants to determine the optimal replacement policy for

Question

14. A construction company wants to determine the optimal replacement policy for the earth mover it owns. The company has a policy of not keeping an earth mover for more than five years, and has estimated the annual operating costs and trade-in values for earth movers during each of the five years they might be kept as shown in the following table: Assume that new earth movers currently cost $25,000 and are increasing in cost by 4.5% per year. The company wants to determine when it should plan on replacing its current, two-year-old earth mover. Use a five-year planning horizon. a. Draw the network representation of this problem. b. Implement your model in a spreadsheet and solve it. What is the optimal solution? c. What other aspects of this problem might an analyst want to consider?

Explanation / Answer

Conclusion: As the cashlfow is the lowest Asset must be replaced now.

The other aspect would be:

1. The Original cost and installation cost of the old machine.

2. Maintenance cost of the new machine.

3. Useful life of new machine

4. Dicounting factor for the cashflow.

5. Impact of new machine on existing revenue or cost.

YEARS 1 2 3 4 5 Operating cost        8,000        9,100     10,700        9,200     11,000 Trade invalue     14,000        9,000        6,000        3,500        2,000 Net cash flow        6,000         (100)     (4,700)     (5,700)     (9,000) Cost of new machine (25,000) (26,125) (27,301) (28,529) (29,813) cash flow (19,000) (26,225) (32,001) (34,229) (38,813)

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