Model Development for Economic Replacement of Equipment in a Depressed Economy

Abstract

Decisions on investments in a depressed economy are usually bedevilled with uncertainties as a result of galloping price changes. A sound analytical base is therefore required that will aid decisions and reduce uncertainties to the barest minimum, if not eliminate them. To this end, a model was developed for the replacement of assets in a depressed economy. The model was applied to the replacement of an equipment in an automobile battery manufacturing company A which desires to replace an old heat sealer (defender), purchased fourteen years ago, with a second-hand (challenger) of the same model acquired from company B. It is observed the investment environment for the period under study which was confirmed depressed as indicated by a persistent rising inflation rate of sinusoidal nature may have beclouded replacement decision in company A due to the effects of price changes. Combined interestinflation rate was used to determine the current value of money with declining purchasing power. Their economic lives were determined while the cost implication of alternative course of action was illustrated and quantified. A comparison of the present worth of the challenger with that of the defender favoured the defender implying it should be retained, though analysis revealed its (defender's) economic life was in its fifth year. Thus, it is recommended that a better challenger with longer economic life be procured for immediate replacement of the defender. Keywords : Replacement, Defender, Challenger, Economic Life, Inflation, Depressed Economy, Journal of Applied Science, Engineering and Technology Vol. 6 (1) 2006 pp. 62-67