Cost Analysis for Equipment Replacement.

Abstract The analysis of costs for use in equipment replacement decisions is not a new topic, for much has been said and written on the subject. However, one who reads this literature finds advocated a confusing diversity of formulas and methods for computing and comparing costs. The objective of this article is therefore to examine these differences and to develop an approach to the problem which will be logically sound and also workable in the solution of practical business problems. It will be limited to methods of determining and comparing costs for use in deciding whether or not to replace an existing piece or type of equipment with a new or different machine capable of performing the same function. The first step in developing a method for analysis of costs to be used in decisions as to replacement of equipment must be a clear statement of the principle underlying the comparison of alternatives in the selection of equipment. From this it is possible to determine what facts are needed and with this in mind one can proceed to collect the data. A cost comparison can then be made with assurance that the results will be reliable within the limits of the precision with which the cost figures have been measured. It will also be found that this approach can simplify a problem the solution to which has often been made complex and confusing.