REPLACEMENT PROBLEMS

Introduction
In Industries all equipment are put to continuous use
which reduces the efficiency of the equipment.
A replacement is needed for the equipment if the
cost incurred in operating and maintaining the
equipment exceeds the benefit derived out of it.
The objective is to determine the optimal time at
which the equipment is to be replaced with new one.
MODELS OF REPLACEMENT
Replacement
Models
Replacement
of items that
deteriorate
with time,
Ignoring time
value of
money
Considering
time value of
money
Items that fails
suddenly
Individual
replacement
policy
Group
replacement
policy
REPLACEMENT OF ITEMS THAT DETERIORATE
WITH TIME, IGNORING TIME VALUE OF MONEY
Time value of money is not considered (Interest rate = 0)
C = Initial cost of equipment,
S(t) = Selling / Scrap value of equipment after t years
f(t) = Operating and maintenance cost at time t
n = replacement period of the item

Annual Cost incurred at time t = C S(t) + f(t)
Total operating and maintenance cost incurred during n years =


Total cost (T) incurred on equipment during n years =


Average annual cost (T
A
) incurred in n years =

n
t
t f
0
) (

n
t
t f t S C
0
) ( ) (
n
T
Replace the equipment at the end of the year having minimum T
A
value
Problems
Small battery operated trucks are used in an industry for material handling purpose.
The operating cost, maintenance cost and resale value for six years are given in table.
Determine when the truck is to be replaced by a new one if initial cost of the truck is
Rs 75,000.
Year of
service
Annual Operating
cost (Rs)
Annual maintenance
cost (Rs)
Resale value
1 10,000 6,000 45,000
2 12,000 7,500 40,000
3 15,000 12,500 20,000
4 19,000 17,000 10,000
5 27,000 20,000 10,000
6 33,000 21,000 5,000
Solution
Year
end
(n)
C S(t) f(t)


f(t) T = C S(t) + f(t)

T
A
= T/n
1 75000 45,00
0
16000 16000 46000 46000
2 75000 40,00
0
19500 35500 70500 35250
3 75000 20,00
0
27500 63000 118000 39333
4 75000 10,00
0
36000 99000 164000 41000
5 75000 10,00
0
47000 14600
0
211000 42200
6 75000 5,000 54000 20000
0
270000 45000
Replaced
Problem
A hand grinding machine (Type A) costs Rs 9500. Annual
operating costs are Rs 220 for the first year and it increases
by Rs 1900 every year. Find the optimal age at which the hand
grinding machine of type A is to replaced along with
corresponding average yearly cost of owning and operating it.
Assume that the machine has no resale value and future costs
are not discounted. Another hand grinding machine (Type B)
costs Rs 10500. Annual operating costs Rs 410 for the first
year and it increases by Rs 820 every year. You have one
hand grinding machine of Type A which is one year old. Should
you replace it with hand grinding machine of Type B and if so
when ?
Type A machine
Year
end
(n)
C S(t) f(t)


f(t) T = C S(t) + f(t)

T
A
= T/n
1 9500 0 220 220 9720 9720
2 9500 0 2120 2340 11840 5920
3 9500 0 4020 6360 15860 5286
4 9500 0 5920 12280 21780 5445
Replaced
Type A machine as to be replaced at the end on third year
Type B machine
Year
end
(n)
C S(t) f(t)


f(t) T = C S(t) + f(t)

T
A
= T/n
1 10500 0 410 410 10910 10910
2 10500 0 1230 1640 12140 6070
3 10500 0 2050 3690 14190 4730
4 10500 0 2870 6560 17060 4265
5 10500 0 3690 10250 20750 4150
6 10500 0 4510 14760 25260 4210
Replaced
Avg Annual cost of Type B (Rs 4150) < Avg Annual cost of Type A (Rs 5286)
Hence, Type A can be replaced by Type B
To determine when type A as to be replace with type B:
The year at which Running Cost of Type A > Avg annual cost of type B (Rs 4150)
YEAR 1 2 3 4
Running cost 9720 11870 9720
= 2120
15860 1840
= 4020
21780-15860
= 5920
5920 > 4150
Replaced at the
end third year
REPLACEMENT OF ITEMS THAT DETERIORATE
WITH TIME, CONSIDERING TIME VALUE OF MONEY
The value of money changes at a period of time.
Done by Present value (PV) or Present worth (PW) analysis.
Interest rate is considered
C = Purchase price of the item (Capital Cost)
R
n
= Running Cost in year n
r = Rate of interest

Discount rate,
r
V

1
1
Present worth expenditure,

1
1
) (
n
n
n
R V C n P
Fixed Annual
installment,
) 1 (
) 1 (
). (
n
V
V
n P X

Items is to be replaced for minimum X value

Standard table to solve problems
Year
(n)
V
n-1
(PWF)
R
n
V
n-1
.R
n
V
n-1
.R
n
C P(n) X
PWF Present Worth factor
) 1 (
) 1 (
). (
n
V
V
n P X

1
1
) (
n
n
n
R V C n P
Problem
A small workshop involved in sheet metal work has a
plan to purchase a small sheet bending machine. A
manufacturer offers two choices namely machine A
and machine-B. The following details are supplied by
the manufacturer.
DETAILS MACHINE A MACHINE - B
Initial Cost Rs 12000 Rs 6000
Running Cost Rs 1920 for first 5
years, increasing by
Rs 480 /yr thereafter
Rs 2880 for first 6
years, increasing by
Rs 480/yr thereafter
Worth of capital 10 percent per year
As a consultant to the workshop, you are required to suggest which
machine is to be purchased and why ?
Machine- A
r = 10 %
V = {1/(1+0.1)} = 0.9091
Year
(n)
V
n-1
(PWF)
R
n
V
n-1
.R
n
V
n-1
.R
n
C P(n) X
1 1 1920 1920 1920 12000 13920 13920
2 0.9091 1920 1745 3665 12000
15665 8205
3 0.8264 1920 1586 5251 12000
17251 6306
4 0.7513 1920 1442 6693 12000
18693 5361
5 0.6830 1920 1311 8004 12000
20004 4797
6 0.6209 2400 1490 9494 12000
21494 4486
7 0.5645 2880 1625 11119 12000
23119 4317
8 0.5132 3360 1724 12843 12000
24843 4233
9 0.4665 3840 1791 14634 12000
26634 4204
10 0.4241 4320 1832 16366 12000
28366 4212
Optimum
Machine - B
Year
(n)
V
n-1
(PWF)
R
n
V
n-1
.R
n
V
n-1
.R
n
C P(n) X
1 1
2880 2880 2880 6000 8880 8880
2 0.9091
2880 2618 5498 6000 11498 6023
3 0.8264
2880 2380 7878 6000 13878 5073
4 0.7513
2880 2164 10042 6000 16042 4601
5 0.6830
2880 1967 12009 6000 18009 4319
6 0.6209
2880 1788 13798 6000 19798 4132
7 0.5645
3360 1897 15695 6000 21695 4051
8 0.5132
3840 1971 17665 6000 23665 4033
9 0.4665
4320 2015 19681 6000 25681 4054
Optimum
Machine B has least annual cost (4033) than Machine A (4204)
Hence Machine B is suggested
REPLACEMENT OF ITEMS THAT FAILS
SUDDENLY
Individual replacement policy:
An item is replaced as soon as it fails.
Group replacement policy:
A decision is taken to replace all item irrespective of its
failure.
An optimal group replacement period is decided.
Items which fails before optimal group replacement period
will be replaced individually.

Formulae used
P
i
= Probability that an item newly installed fails during i
th

week
N
i
= No. of replacements made at the end of i
th
week
N
0
= Items which are newly installed






Expected life of each item = in days/weeks/months

Avg. no. of failure = Total no. of items / Expected life of
each item

1 3 3 2 3 1 4 0 4
1 2 2 1 3 0 3
1 1 2 0 2
1 0 1
P N P N P N P N N
P N P N P N N
P N P N N
P N N

n
i
i
iP
1
Individual
replacement
Policy
Group
replacement
Policy
Problems
The following failure rates are for a resistor in an
electrical system. The number of resistor in the electrical
system is 1000 at the beginning.
End of week 1 2 3 4 5 6 7 8
Cumulative
Probability of failure
0.03 0.15 0.24 0.44 0.67 0.85 0.95 1
Cost of replacing an individually failed resistor is Rs 1.30
If all the resistors are replaced in a group, the cost per
resistor is 32 paise.
Determine the optimum group replacement period and
cost occurring during individual replacement and group
replacement.
Individual replacement policy
Pi = Probability of resistor that fails in i
th
week





Expected life of resistor = = 4.67 weeks

Avg, no of failures = 1000 / 4.67 = 214 (approx)

Weekly cost of individual replacement = Avg. no of failure x cost of
individual resistor = 214 x 1.30 = Rs 278.20

8
1 i
i
iP
P
0
=0 P
1
=0.03 P
2
=0.15- 0.03 =
0.12
P
3
= 0.24 0.15 =
0.09
P
4
=0.44-0.24 =
0.20
P
5
=0.67-0.44 =0.23
P
6
=0.85-0.67 = 0.18 P
7
=0.95-0.85 =
0.10
P
8
= 1-0.95=0.05
Group replacement policy
No of items to be replaced:

N0 = 1000
N1 = N0 X P1 = 1000 X 0.03 = 30
N2 = N0 X P2 + N1 X P1 = 1000 X 0.12 + 30 X 0.03 = 121
N3 = 97
N4 = 220
N5 = 265
N6 = 254
N7 = 212
N8 = 202
Individual cost / resistor = Rs 1.30
Group replacement of 1000 resistors = Rs 0.32
Determining cost of replacement:

Period Total Cost
Avg cost /
week
0 1000 x 0.32 NA
1 1000 x 0.32 + 30 x 1.30 = 359 359
2 1000 x 0.32 + 30 x 1.30 +121 x 1.30 = 516.90 258.15
3 1000 x 0.32 + 30 x 1.30 +121 x 1.30 + 97 x 1.30 =
642.40
214.13
4 642.40 + 220 x 1.30 = 928.40 232.10
Optimum
SEQUENCING PROBLEMS
Introduction
To determine the order in which jobs or activities are
to be performed.
Types:
Sequencing
Processing n
jobs through
2 machines
Processing n
jobs through
3 machines
Processing
n jobs with m
machines
Travelling
salesman
problems
Processing n jobs through 2 machines
Developed by S.M, Johnson
Two machines A and B are involved
Jobs are processed in the order AB
Steps Involved:
Examine Process times on machine A and B together and
determine the smallest processing time.
If the selected time is on machine A, note the job from first
If the selected time is on machine B, note the job in last
column
Strikeout the assigned job and continue the process.

Problems
There are six jobs each of which must go through
the two machine A and B in the order AB. Processing
time in hours are given in table. Determine the
sequence of six jobs which will minimize the elapse
time and idle time.
JOB
PROCESSING TIME
MACHINE A MACHINE - B
1 3 2
2 6 5
3 4 6
4 7 3
5 5 2
6 8 8
Solution JOB
PROCESSING TIME
MACHINE
A
MACHINE -
B
1 3 2
2 6 5
3 4 6
4 7 3
5 5 2
6 8 8
Sequencing Display
Min time on machine
A
Min time on machine
B
1 5 4 3 2 6
Sequence order is : 3 6 2 4 5 1
To Calculate elapse time and Idle time
Optimal
Sequence
Machine A Machine - B
Time In Time out Time In Time out
3 0 0 + 4 = 4 4 4 + 6 =10
6 4 4 + 8 = 12 12 12 + 8 = 20
2 12 12 + 6 = 18 20 20 + 5 = 25
4 18 18 + 7 = 25 25 25 + 3 = 28
5 25 25 + 5 = 30 30 30 + 2 = 32
1 30 30 + 3 = 33 33 33 + 2 = 35
JOB
PROCESSING TIME
MACHINE
A
MACHINE -
B
1 3 2
2 6 5
3 4 6
4 7 3
5 5 2
6 8 8
Elapse time = 35 hrs
Idle time of machine A = 35 33 = 2 hrs
Idle time of machine B = (4-0) + (12-10) + (20-20) + (25-25) + (30 28)
+ (33-32) = 9 hrs