BIZOMAT MAKEOS · Money
Repair or Replace (Defender and Challenger Equivalent Annual Cost)
Should I keep running this old machine, with its rising running costs, or replace it with a new one, comparing them as equivalent annual costs?
Replacement decision between an existing machine (the defender) and a new one (the challenger): the defender’s equivalent uniform annual cost from its present market value, first-year running cost rising by a yearly gradient (using the gradient factor, as the interest factors tool) and its salvage at the end of its remaining life, the challenger’s equivalent annual cost from price, running cost and salvage (as the EUAC comparison tool), the yearly difference and the decision.
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How this tool works
Inputs, units and where to find them
| Input | Unit | Typical source |
|---|---|---|
| Interest rate | % | Interest rate or minimum acceptable rate of return. |
| Defender (keep the old machine) | ||
| Present market value | $ | What the old machine would fetch if sold now (its opportunity cost). |
| Running cost next year | $/yr | Operating and maintenance cost of the old machine next year. |
| Yearly increase in running cost | $/yr | How much that cost rises each year after. |
| Salvage at the end | $ | What the old machine will fetch at the end of its remaining life. |
| Remaining life | years | Years the old machine could still run. |
| Challenger (new machine) | ||
| Price installed | $ | Price of the new machine installed. |
| Running cost per year | $/yr | Yearly operating and maintenance cost of the new machine. |
| Salvage at the end | $ | Salvage of the new machine at the end of its life. |
| Life | years | Life of the new machine. |
What each input means
Open an input to see what it is, its units, the worked example and the common mistakes, with a small diagram.
What this means: Interest rate
- What it is
- The yearly interest rate or minimum acceptable rate of return your organisation uses to compare money spent at different times.
- Units and format
- Enter a number in %: percent: the number is read as a percentage, so type 8 for 8 %. The form accepts 0% to 50%. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 8% as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Get it right
- Enter the percentage itself, for example 6 for 6 %.
Defender (keep the old machine)
What this means: Present market value
- What it is
- What the existing machine would sell for today. Keeping it gives up this cash, so the tool counts it as the capital cost of keeping it.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with $15000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Get it right
- Use today’s realistic resale value, not the book value or the original price.
What this means: Running cost next year
- What it is
- The operating and maintenance cost of keeping the old machine running for the coming year.
- Units and format
- Enter a number in $/yr: money per yr. The form accepts $0/yr or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with $14000/yr as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
What this means: Yearly increase in running cost
- What it is
- The amount by which the old machine’s yearly running cost rises each year after the first, from its repair history.
- Units and format
- Enter a number in $/yr: money per yr. The form accepts $0/yr or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with $2000/yr as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A steeper rise raises the defender’s equivalent annual cost.
What this means: Salvage at the end
- What it is
- What the old machine is expected to fetch when it is finally retired at the end of its remaining life.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with $3000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
What this means: Remaining life
- What it is
- The number of years the existing machine could realistically keep running.
- Units and format
- Enter a number in years: years. The form accepts 1 years to 50 years. Use a whole number. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 4 years as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
Challenger (new machine)
What this means: Price installed
- What it is
- The full cost of the new machine ready to run: price, delivery, installation and commissioning.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with $80000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher price raises the challenger’s equivalent annual cost.
What this means: Running cost per year
- What it is
- The yearly operating and maintenance cost of the new machine, taken as the same every year.
- Units and format
- Enter a number in $/yr: money per yr. The form accepts $0/yr or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with $6000/yr as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
What this means: Salvage at the end
- What it is
- What the new machine is expected to fetch at the end of its service life.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with $10000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
What this means: Life
- What it is
- The years of service expected from the new machine, over which its price is spread.
- Units and format
- Enter a number in years: years. The form accepts 1 years to 50 years. Use a whole number. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 10 years as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Get it right
- The two machines may have different lives; the comparison is per year.
Method and formulas
- Capital recovery (A/P, i, n) = i (1 + i)ⁿ ÷ [(1 + i)ⁿ − 1]; sinking fund (A/F) = i ÷ [(1 + i)ⁿ − 1]; gradient (A/G) = 1 ÷ i − n ÷ [(1 + i)ⁿ − 1] (as the interest factors tool).
- Defender EUAC = MV (A/P) + A₁ + G (A/G) − salvage (A/F).
- Challenger EUAC = P (A/P) + running cost − salvage (A/F) (as the EUAC comparison tool).
- Example: keeping costs 20,671 a year, replacing 17,232; replace it, saving 3,438.9 a year.
Limitations
- Before tax; repeatability of the challenger is assumed when lives differ.
- Productivity and quality differences must be added as costs or savings.
- Example values are illustrations. Replace them with values for your actual task.
Typical uses
- Decide whether to replace an ageing machine
- Justify a replacement budget
- Find how fast running cost must rise to justify replacement
Who it is for
- Maintenance managers
- Engineering managers
- Finance analysts
What you get
- Defender equivalent annual cost
- Challenger equivalent annual cost
- Yearly difference and decision
Interpreting the result
- The old machine’s sunk cost does not matter: only what it could be sold for now.
References
- Machinery’s Handbook, 29th edition (Industrial Press, 2012), printed pp. 134–146. Topic reference; no source tables or recommended settings are reproduced.
Learn the Concepts Behind This Tool
These BIZOMAT Library readings explain the method this tool uses, with worked examples.
Method explained here · BIZOMAT original book
Running an insulation test program
In Insulation Testing by the Numbers
What it covers: Putting the tests together: what to test and when, site criteria, records, safety, the blast freezer results after the fix, rewind or replace, and testing that cost more than it saved.
BIZOMAT tools are screening and decision-support utilities. Verify important financial, engineering, safety, legal or operational decisions using appropriate professional standards and your organisation’s approved data.
Open the Repair or Replace (Defender and Challenger Equivalent Annual Cost) calculator