Equipment Replacement Policy & Break Even Point Theory.pdf

This document presents an overview of Equipment Replacement Policy and Break-Even Point Theory, explaining their significance in achieving cost efficiency and productivity in construction operations. It discusses factors influencing replacement decisions, economic evaluation using break-even analysis, and the impact of sustainability in equipment management. The content integrates theoretical and practical aspects relevant to the evolving Indian construction industry.

1. mv EQUIPMENT REPLACEMENT
POLICY
AND
BREAK-EVEN POINT THEORY
(GRAPHICAL METHOD)
Compiled & Prepared by:
Mrunali Vasava
© 2025 MV – Mrunali Vasava | All Rights Reserved

2. mv In construction projects, equipment plays a crucial role in ensuring
productivity, quality, and timely completion. However, with time,
equipment deteriorates, operating costs increase, and newer
technologies emerge in the market. Hence, deciding when to replace
equipment becomes a key economic decision for any firm.
Equipment replacement decisions are important because:
They involve large capital investment.
A wrong decision may reduce the profitability of the company.
Equipment directly influences output, quality, and
competitiveness.
Therefore, a scientific approach like Break-Even Point (BEP)
analysis is essential in making replacement decisions.
A firm faces mainly three kinds of equipment replacement decisions:
1. Replacement due to wear and tear
Capital equipment wears out physically with use.
Example: A concrete mixer or excavator after 10–12 years of
use.
2. Replacement for expansion
New equipment may be purchased when a firm expands
production capacity.
Example: Buying additional batching plants for metro projects.
3. Replacement due to technological obsolescence
Introduction of new/improved equipment in the market that
reduces cost, increases productivity, or improves quality.
Example: Replacing old diesel equipment with hybrid/electric
excavators. Equipment Replacement Policy
© 2025 MV – Mrunali Vasava | All Rights Reserved

3. mv Factors Influencing Equipment Replacement
Equipment may need to be replaced before its estimated life due to:
To reduce production cost.
To reduce fatigue of workers.
To raise quality of output.
To increase productivity/output.
To improve convenience, safety, and reliability.
To comply with environmental regulations
To meet RERA compliance and green building norms in India.
To utilize automation, AI, telematics, and IoT features for
efficient operation.
Guidelines in Replacement Analysis
For Existing Equipment
Consider:
Operating cost
Repairs and maintenance cost
Down-time cost (loss due to idle equipment)
Salvage value (resale value)
Rebuilding cost (if major overhauls are possible)
Do Not Consider:
Original purchase cost (sunk cost)
Money already spent on repairs (past cost)
Unrealistic book value in accounts
For New Equipment
Consider:
Initial cost
Interest on capital investment (finance cost)
Salvage value at end of useful life
Cost advantage of improved product
Labour savings due to automation
Fuel efficiency, eco-friendliness, and digital connectivity
Do Not Consider:
Any savings not clearly assessable
Overhead charges not affected by replacement © 2025 MV – Mrunali Vasava | All Rights Reserved

4. mv BEP is the point where the total cost of old equipment = the total
cost of new equipment at a particular level of output.
Graphically, it is the intersection of the cost-output curves of old and
new equipment.
If output < Q (BEP) → Old equipment is more economical.
If output > Q (BEP) → New equipment is more economical.
Steps in BEP Analysis for Replacement
Estimate operating costs of old equipment (fuel, repairs,
downtime, etc.).
Estimate costs of new equipment.
Plot cost vs. output curves for both machines.
Find the intersection point = BEP.
Take a decision: Replace only if expected production is above
BEP.
Example:
Suppose a construction firm is using an old concrete mixer.
Old mixer cost per unit output increases with time due to
breakdowns.
The new mixer has a high capital cost but a low operating cost.
By plotting the cost curves, BEP shows that if the firm’s output
is more than, say, 1000 m³ concrete/year, new equipment is
better. Break Even Point Theory (Graphical Method)
© 2025 MV – Mrunali Vasava | All Rights Reserved
Break Even Point
New Equipment
Old Equipment
Cost
Output(Quantity)
Q
C

5. mv In addition to classical guidelines, modern equipment replacement
must consider:
Fuel Efficiency & Sustainability
Equipment running on electric/hybrid power is entering the
Indian market.
Example: Tata Hitachi and JCB India introducing electric
excavators.
Telematics and IoT Integration
Many modern machines come with real-time monitoring
(GPS, fuel tracking, predictive maintenance).
Helps reduce downtime costs.
Government Policies
BS-VI norms for construction machinery in India.
Old polluting machines may face restrictions in urban areas
(e.g., Delhi NCR).
Labour Productivity
Automated equipment reduces labour cost and increases
precision.
Example: Slipform pavers in highway construction.
Digital Twin & BIM Integration
Equipment decisions are now simulated in BIM 360 and
Digital Twin software to check life cycle costs before
purchasing.
Financing Options
Indian market offers leasing, rental, and buy-back schemes,
reducing the burden of outright purchase.
Equipment rental market is growing rapidly in India (~USD
5 billion). Current Market & Technology Considerations
(India - 2025)
© 2025 MV – Mrunali Vasava | All Rights Reserved
Output(Quantity)
Q

6. mv To decide when to replace, managers should:
Compare Annual Equivalent Costs (AEC) of old vs. new
equipment.
Use BEP theory to check economic viability.
Consider non-financial factors (safety, environment, technology
compatibility).
Take into account future expansion plans and government
regulations. Decision-Making Framework
© 2025 MV – Mrunali Vasava | All Rights ReservedReplacement of equipment is a continuous process and must be done
scientifically.
Break-Even Point theory provides a simple but effective graphical
method to compare costs.
In the current Indian market, additional factors such as
sustainability, digital technology, government norms, and financing
models are critical.
Conclusion

7. mv THANK
YOU!!
Do you have any questions??
[email protected]
© 2025 MV – Mrunali Vasava | All Rights Reserved