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Replacement Model-II

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Mayank Gautam
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8 views

Replacement Model-II

Uploaded by

Mayank Gautam
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Replacement Model Type – II

 As the money value changes with time, we must calculate the present value or present worth of the money to be spent few years hence.
 If it is the interest rate (i may be considered as the rate of inflation or sum of rate of inflation or the interest) per year.
 One rupee invested will be (1+ i)1 one year hence.
 One rupee invested will be (1+ i)2 two year hence.
 One rupee invested will be (1+ i)3 three year hence.
 One rupee invested will be (1+ i)n n year hence.
 In other words, making payment of one rupee after n years is equivalent to paying (1+i)-n now.
 This quantity (1+i)-n is called the present worth or present value of one rupee spent n years from now.
 Present value of one rupee spent n years hence: (1+i)-n = vn
 Discounted Rate / Discounted Factor / Present Worth (always less than unity) v = 1/(1+i)
 In order to find optimal policy of replacement i.e. when a manufacturer should replace a machine on which he is working; let us assume
that the machine is replaced after n years.
 Let C be the purchase price of machine
 Let R1, R2, R3………………Rn be the running cost in 1st, 2nd, 3rd and nth year respectively.
 Assume scrap value of the machine is Zero, and that all payments (cash outflows) are made at the beginning of the first year.
 The present worth of the expenditure after n years: Pn = C + v0R1+ v1R2+ v2R3 ------------------ vn-1Rn
 Pn is the amount of money required now to pay all future costs of acquiring and operating the machine assuming it is to be replaced after
n years.
 Now Pn increases as n increases which mean that the present worth, if the machine is replaced after n+1 year is greater than if it is
replaced after n years. Thus, for any additional amount we get an extra year’s service.
 We are therefore, interested in finding some function of replacement interval which allows for this.
 In order to do so, a manufacturer invest P n by borrowing money at the interest rate I and replay it off in fixed annual payments of value
x throughout the life of machine. Thus, after n years he will have paid off the total coat Pn of the machine.
 The present worth of fixed annual payments, each of value x for n years is: Pn = xv0+xv1+xv2----------xvn-1
 Pn = [(1-vn)/(1-v)]*x ___________________ [Geometric Progression Formula]
 x = [(1-v)/(1-vn)]*Pn
 For fixed annual payment to be minimum, there must be dx/dn = 0
 The resultant response can be written as: Fn = (Fn / 1-vn) where Fn is the fixed annual payment value.
 Now as per the finite difference method: ∆Fn-1 < 0 < ∆Fn
 ∆Fn = Fn+1 - Fn
 ∆Fn = Positive Quantity * [[(1-vn)/(1-v)]*Rn+1] – Pn]
 Now as per this equation: ∆Fn-1 < 0 < ∆Fn

 Now Case – 1

 Now Case – 2

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