Replacement Analysis in Entrepreneurship

This ppt is about entrepreneurship subject in engineering

1. Replacement & Alternative Analysis

2. Deterioration Obsolesce Inadequacy Working Conditions Economy Environment Reasons for Replacement

3. Factors necessary for Replacement

4. Basic Concepts and Terminology Replacement projects are decision problems involving the replacement of existing obsolete or worn-out assets. The continuation of operations is dependent on these assets.  Defender : is an existing asset  Challenger : is the best available replacement candidate  Current market value : is the value to use in preparing a defender’s economic analysis  Sunk cost : past costs that cannot be changed by any future investment decision and should not be considered in a defender’s economic analysis

5. Following are some of the important methods which are used for equipment replacement studies: Pay-Back Period Method Total Life Average Method Annual Cost Method Present Worth Method Rate of Return Method M.A.P.I. Method. Methods Used for Equipment Replacement Studies

6. 1. Pay-Back Period Method: This method of equipment replacement studies determines as to how long it will take (in years) to pay back invested capital. Let, P = Pay-back period in years. C = Original capital investment. R = Annual return expected (i.e. total annual earning after deducting taxes). Then P = C/R This method is not much reliable as it does not take into account its insurance, interest and maintenance. Further, in the beginning the return is generally less, which increases gradually but here it is considered to be constant. This method does not consider depreciation and obsoles­cence.

7. 2. Total Life Average Method: In this method of equipment replacement studies, all the costs involved in buying, operating and maintaining an equipment or asset are added together into one total figure and this sum is divided by the total estimated life to get an average annual cost.

8. 3. Present Worth Method: This method of equipment replacement studies is accurate and reasonable and used to evaluate the present value of new equipment. For the purpose of comparison, future costs are translated into today’s value of money. A “present worth of rupee” is today’s value of money invested (at certain interest rate) after given number of years from today.

9. 4. Annual Cost Method

10. 5. Rate of Return Method

11. The term MAPI stands for Machinery and Allied Products Institute of Washington, who has developed this method. This is a method developed by George Terborgh , the Director of this institute. The method is described as follows: Almost all the equipment’s are subjected to deterioration and obsolescence in varying de­gree with the passage of time. Thus with the passage of time operating inferiority increases. Hence the old machine has its operating inferiority high and book value as low. While a new machine will have operating inferiority minimum and cost, at a maximum. Hence the problem before manager is to choose between more capital cost and less imperfection, on one hand and less capital cost and more imperfection, on the other. The MAPI has developed a new approach which helps in deciding this problem. The exist­ing equipment which is to be replaced is known as DEFENDER and the new which will replace the old one is known as the CHALLENGER. For estimating as to whether the proposed replacement is profitable, the “adverse minimum” of the defender and the challenger are found and compared. “Adverse minimum” of the defender or the challenger is the lowest sum of the time adjusted average of capital cost and operating inferiority (expressed in terms of money) obtainable from a machine. The calculations can easily be done with the help of MAPI charts. 6. MAPI Method:

12. Advantage of MAPI Method: 1. Calculations are simple. 2. Management knows as to when a machine is to be replaced. 3. This method can be applied to a single as well as a combination of several machines for replacement. 4. It aids in budgeting equipment expenditure. 5. There is full provision for future deterioration and obsolescence on the new machines.