PVE ie 10.0 10.1 10.2 10.3 10.4 y 10.5 10.6 Introduction Failure Patterns 40.1.1 Definition 40.1.2 Behaviour of Machines 40.1.3 Failures Based on the Volume of Failure 40.1.4 Types of Failures Based on the Mode of Failure Failure Costs Types of Replacement Problems Type - 1: Replacement Policy when Money Value does not Change with Time Practice Problems Replacement Policy for Practice Problems items When Money Value Changes with TimeREPLACEMENT ANALYSIS values end decide replacement age, * Make comparison if more machines are Biven, ‘When money value does not ‘When money value changes with Croup Replacement change with time time ~ Caleulte nc val by (C-S) ~ Calculate nt val C or (C-8) ~ Find probability of fatueof tem at the ~ Camulate unming cost ie, ER, ~ Calealate PWP (/) nd ofeach period ,) ~ Calalte wal costie, (C5) +R, ~ Find product of unning cost and PWF ~ Find munber of replacements made ws! and curulate ZB, v"! >, considering its previous replacements. ~ Calculate average cos fora yetr ie, 9 Wa(CS)+ER) os ~ Add net value tothe above ie, ~ Calculate foal cost of group rep. fe ~ Late nina soe sone ceER Fat yg i peo sd deci eeprt “oe corresponding mumber of peiods. . 4 j CHER ~ Locate minimum cost period and dcide Compare if more than one machine is ze oper ae ~ Locate minimum vale among these (C= Cost of machine » S= Salvage value ® R, = Running cot in n® year N= Number of years + At C = Average (Annual) total coat» v"-! Present Worth Factor (FWP) - arr avn ‘ teplacement Analysis 518 10.0 Introduction No machine is immortal and immune completely to any failures. No matter how safely you run, how closely you follow the instructions of the manufacturer oF supplier, best you maintain to its standards and specification. Perhaps we can -oaly ay toprevent or prolong thé occurrence of failure if we know the probable reason for its occurrence. | in such cases, some times we can temporarily stop the occurrence of the failure and Some other times we can reduce its impact or volume of ~failure. However, this is possible if we have the complete knowledge of the failures that may occur on the given equipment and their causes, effects or costs and the remedial measures. The awareness of equipment failures often makes the engineer so confident that after the rectification of the failure he will be able to assure the 10.1 Failure Patterns 10.1.1 Definition ___ Failure is defined in many ways. Of them, the popular and appropriate are given below. _ __ Failure is defined as inability of a machine or equipment to perform the intended or specified job under specified conditfons. A failure is defined as an event that changes product or machine or equipment from an operational con al condition to a non-operational condition. a Failure lefined as "Non-conformance to some defined performance criterion”. 10.12 Behaviour of Machines Almost all machines or equipment whether electrical or mechanical or electronic, assumed to behave in the same manner. These machines are normally to have one of the three types of behaviours with reference to the failures expected that occur. These three behaviours are as follows : 1. The rate of failures is decreasing. 2. The rate of failures is constant. 3. The rate of failures is increasing. i hhine is found to have all the three behaviours iy ery Certain period of its lifetime. Therefore, it has gained siginificantly and distinctly in certain peri if so much of significance in replacement analysis studies. Machine Life Cycle (MLC) - Bath Tub Curve : Machine Life Cycle is classified into in three phases, which is analogous (0 the three phases of Human Life Cycle as shown below. 1. Infancy Phase : Early failures or infant failures. 2. Youth Phase : Random failures or rare event failures. Se3. Old Age Phase : Wear out failures or old age failures Decreasing failure Random failure rate in o rate in infant stage rate in youth stage Sw thane] t Wearout faite’ —— “iure | —F— ie. /] 7 Reduction of pan 1 period 1 Peri Unartadicieng maintenance Rate of cost of failure Lime 1 O o__ Suitable maintenance policies for various stages in machine life cycle Contaractual maintenance | Preventive maintenance, | Replacement, recondition ‘oF reffering to original breakdowsvcorrective | operate to failure & ‘equipment manufacturer | ™aittenance/condition | corrective maintenance etc duc to guarantee basedtime based/failure | or some condition based ‘warrantee based maintenance maintenance techniques techniques 10.1: BATH TUB CURVE 1. Early Failures or Failures at Infant Stage of Machine : The machine immediately after it je brought from the Original Equipment Manufacturer (OEM), may not work wil efficiency due to various reasons sueh_ as the initial friction besveen tie moving of Totating pa parts, not adjusting to the environment, lack o} skill at inrowtetge of the TSson operating on itetc. To control these failures one has to know about the machine thoroughly and follow the instructions strictly. Inspite of following the instructions given by OEM strictly, the ‘output may be low or slow or delayed. Yer, itis necessary in the interest of good running and long life ofthe machine. For example, when you buy a scooter, the OEM gives you instructions that you have to run the vehicle at not more than 40 KMPH upto first 1500 km.This obviously restricts and slows down the job and may.cause the inconvenience to the user. Butif this is not followed it may lead tastrophic failure by affecting the piston movement in the cylinder or high fuel consumption which Will be uneconomical Such problems are very common (any Hew machine. However, ‘he period of these infant failures may vary from one machine to the other. (See figure table). During this failure period, in the event of machine is usually referred to OEM (of the machine is covered under guarantee warantee) or any contracttal 2. Random or Rare - Event Failures : ; These failures occur in young stage of the machine. After passing over the infant stage, the machine will be running with its full efficiency and the user will enjoy its full fruit in this period only. The effective usage and correct maintenance can enhance this portion of its life. User’s care may come down in this stage due to the facts that the user might have got boredom or monotony or some sort of negligence as he observes the machine will be working with full efsciency though much care 1S not taken. This act in fact may or may not result as failure immediately, but its impact will be there on long run by affecting its life and wear out of the parts etc. However, the immediate failures are known as random or rare-event failures. The reliability ET be very hi: tf : ly intenance atid breakdown maintenance are adapted in this stage to low cost failures while RCM. (Reliability Centered Maintenance) and CBM (Condition Based Maintenance] jues are employed on the machines that are high cost or in case the failure may lead to high cost or damage. (See figure and table) Cee eeeKer 517 5. Old Age of Wear Out Failures ; a lakes s wee “forts put by maintenance are attributed to this stage and costs et deen 7 ae ifthis Sage is not detected. Calender time is not only the ieee iange. re msance a machine used sparingly and a machine 7 ut on ito inereate is life during “in box are a few factors governing the old age failures wever, 'Y Decause of the worn out parts of the machines, As and when Whe ae achine, a plant engineer may have to choose one of the following alternative Strategies. (See table and figure) - ~ ~~ Replacement of the machine with the new one. w~ * Reconditioning of the machine. vu * Updating with the new technological features, © Operate to failure and corrective maintenance (as long as its average annual maintenance cost is less than or equal to the interest ‘on the cost of the new machine) or selling in seconds. L-~® Scrapping. tis important to note here that the age of a machine (infantyoung/middle/old) is not just decided by the calendar time but by its Tunhing time and other factors such as environment, usage etc. — — ‘The above phases are summarised in the following tabular form. Cause of Suitable Failure Maintenance Policy Faulty Design, Erratic (Under warantee / operation, Environment arantee) refer to OEM problems, Installation ————— errors, Initial fiction ((Nowarantee) Random or (Operation errors, Heavy Break-down maintenance, Chance or workloads, Over run Preventive maintenance Rare-Event| failures Reliability centered maintenance, condition based maintenance i i Operate to fail and |Wear-out |Wear, Tear, Creep, Fatigue, ate to Age failures | Weakened parts ‘corrective maintenance Reconditioning or! replacement policies or scrappinyFailure rate 10.13 Failures Based on the Volume of. ‘Fatlure i ce jjures, which can be rectified in few mim Le-1. Small Failures : These are the failures, which ¢ tified ot, ‘These failuers are very common on any machit These will not Have apy considerable impact on the machine performance’ and on the operator, we Minor Failuers : These are the failures, which can be rectified in a few hour, or with a litde effort. The failures of this kind will have a little to considerable effect on the productive work and could hardly damage the machine or men or environment — uv & Major Failures : These failures take few days to rectify. They aso may require large work force, knowledge and skill to rectify. These failures may cause considerable damage to the machine, minor injuries to men and affects § the regular work. 4 Catastrophic Failures : These are the costliest failures. The occurrence of such failures may cause the damage to the machine, men and some times the environment also. The rectification or recovery from the Tosses ofthis fare 10.14 Types of Failures Based on the Mode of Failure 1. Sudden Failures :These types of failures occur in items after giving some _petiod of desired service rather than deterioration while in service. This period of giving desired service isnot constant but follows some frequency distribution, which may be progressive, retrogressive or random in nature. (a) Progressive Failure : Ifthe probability of failure. in the beginning of item is less and gradually increases in its life such failure is called ‘Progressive failure. For example, light bulbs and tubes fail progressive). | ane ! i 3 § Gi a é Time ——- - (@) Progressive Failure Time —— Time —" (b) Retrogressive Failure (¢) Random Failure Patter FIGURE 10.2; FAILURE PATTERNS OF SUDDEN FAILURES(8) Rewogressew Rashere > If probability of failure in the beginning of the life of an item is more but as ume passes the chances of its failure become less then such failure is said to be retrogressive (c) Random Faihere : In this type of failure, the constant probability of faihure 's associated with items that fail from random causes such as physical shocks. not related to age. For example, vacuum tubes in air-burn ‘equipment have been found to fail at a rate of the age of mbe. 2. Gradual Failures : Gradual failure is progressive in nature. i.e. as the life increases, its operational efficiency also deteriorates resulting in increased “running (maintenance and operating) costs. They also cause decrease in its productivity and decrease in the resale or salvage value. Mechanical items tike pistons, rings, bearings etc., and automobile tyres fall under this category [Faire level] [Shutdown level] ‘Alarm level Deterioration — ‘Normal level FIGURE 10.3: GRADUAL FAILURE PATTERN 10.2 Failure Costs Cost Involved in Machine Failure Analysis : ‘While analysing the machine failure we are concerned with the following costs. 1 1. Purchase cost of machine or equipment capital investment. 2. Depreciation or salvage value or scrap value. “ 3. Running costs including Maintenance, Repair and Operating (MRO) costs > 4. Fialure costs and damage costs. In the above four, the first three are inevitable, but failure costs can be prevented by better maintenance policies. On critical examination, we ean notice that the = ihre costs depend on age of the machine. These costs vary with the running age fol we 7 71. Purchase costs of machine or equipment is considered to be independent of age of machine, However the interest on the investment is assumed to be lost, 2. Resale value or salvage value or scrap value of the machine decreases with the running age of the machine. As the machine grows old, its resale value Come, down. This decrease depends on actual or expected condition of the machine. 8. Running cost or operating cost or maintenance cost of the machine is due to its minor failures or preventive maintenance or operating costs etc. These wil} increase on the machine as the age grows. This is assumed to be increasing chie to the wear and tear on the moving parts of the machine. The above costs are shown graphically on a hypothetical machine here below. Running cost Purchase cost of machine Min.cost} a 2 Optimum leve! Age of the Machine IRE 10.4: COST INVOLVED IN REPLACEMENT ANALYSIS Summing, the above three costs, we can notice that the average total cost decreases for certain period and then increases. The age when the graph shows its minimum costs will be optimum age of replacing the machine. oes Necessity or Significance of Replacement : The replacement of parts or entire machine will become significant and necessary in the following cases. 1. When average costs of repairs or maintenance or operating goes higher ‘had the costs of machine. Or in other words, the cost of maintenance will increase io such an extent that the average annual repair or maintenance cost is $F ater ~ than or equal to costs of new machine. 2. When the machine completely fails to work very frequently by which th P rupted, — _Predittionscheaites sre imerrupted. 3. Machine runs with less efficiency and therefore not economical.wer 4. Modified or new designs in the market may give an edge of advantage such as reduced cost of production or ease d = ble in new design eu and comfort of operation or more functions 5. If it is expected that the existing mod oe eee model may become absolete or resale vale 6. pithe item is non-repairable type or use & throw type. 10.3 Types of Replacement Problems The replacement of machine is considered as the following three types in this Type -1: Replacement policy for items when money value remains unchanged with time. Type - IT: Replacement policy for items when money value changes with time. Type - IIT: Group replacement policy. ‘These are explained in detail with examples and illustrations in the sections to follow. 10.4 Type - 1: Replacement Policy when Money Value does not Change with Time Let us now find the optimal policy for the case of replacement when money value does not change with time. Let C =capital or purchase cost of new item. S_ = Scrap or salvage or resale value of the item at the end of ¢ years. R(@® =running cost for the yeat t. n = replacment age of the equipment. Here two cases arise. Ifthe equipments used for ‘’ years, then the total cost incurred over this period is given by Tc = capital (or purchase) cost - scrap value at the end of ¢ years + running cost for t years. =C-S+JR@dt o‘Theretore the average cost per unit time incurred over the period of n Years, is 7 atc, =2 c-s+fRoa a To obtain optimal value of n for which ATC, is minimum, differentiate 4 with respect to» and set the first derivative equal to zero. i.e. minimum of ATC, Tm . 2 a RO) _ 1 rp a=0 HATS] =-gle- 1+ a ) > or wet fe-sefana. eo 0 R(n)=ATC, HQ Hence the following replacement policy can be derived with the help of equation (2) Policy : Replace the equipment when the average annual cost for n years becomes eual to Be ~ current/annual running cost. currentionnual renting cost, The average cost incurred over the period n is given by . ATC, ~sfe-seZa ee ® t=0 * IfC-S and Y) R(O are assumed to be monotonically decreasing and increasné t=0 Tespectively, then there will exist a value of n for which ATC, is minimum. Thus ** shall have inequalities ATC, _ > ATC, 0 and ATC, ,,-ATC,>0Rewriting equation (8) for period n + 1, we get ; nel ATC, 41 = fs} n+ tol n+l tal " “air le-seE noone , C-5+ FRO wok t=1 R(n+1) n + a n n+l = sT0, ; Ret) n+l ntl R (ntl) ime n n Therefore ATC, , )~ATC, = "ATC, + POD, are, [_2 1 n+l n+l Rint) ATC, n+l n+l Since ATC, , - ATG, > Owe get Rin+1)_ ATC, q+l) ntl R(n+1)-ATC, >0 R(n+1)>ATC, Similarly ATC, _ ATC, > 0 implies that R (n) < ATG,_.- » 4) ‘This provides the following replacement policy. — Policy 1: If the next 1, running cost, R(n+-1)-is more than average cast of nth year, ATC ‘then itis economical to replace atthe end of n years _—_ ee | ® ie. Ro+y>t C-S+ TRO . t=0524 Policy 2: If the present year's running, cost Operations Research : Theory and p, dns than the previous year’s average ca, ATC, ce -1 then do not replace. nt ie. Roy C-S4+ DRO, n 10 The Procedure : “Thus the procedure for obtaining the in the case of money value not changin Step 1: Draw the table with columns as shown below and enter the values of column, 2, 8 and 4 as given in the problem. ‘Cumulative | -roeat Cost (TC) = decision when to replace the equip, with time can be outined 8 fag Average total cox: ‘Salvage | Running in t =ATC = | | Net value | running cost seme | equipment | value | Cost 1 , me jermpmee | |e] | ga | Ore 3[Co+ER a @ | ® | ® [@=@-@| @=-LH | M=O+O | sO Step 2: Calculate net value by difference of cost and salvage value (C-S)i.e., 2nd columa value minus 3rd column value and enter in column 5 Step 3: Calculate cumulative running costi.e., ) R, cumulation of column 4 and ente! in column 6. Step 4 Calculate otal cost TC =(C-S) + F. Ry ie. sum of Sth column value and 62 column value to enter in col. 7. Step 5: Calculate average total cost for n years, ie., divide 7th column value by '* : 1 column value ie., ATC = =-{(C-5) + 5 Ry} and enter in co. 8. Step 6: Observe the values in column 8 and identify the minimum value: Tbe 1 correspondi this mini ii i es ponding to this minimum value is the age of the equipmentThis is illustrated through the numerical example given below. ILLUSTRATION 1 A firm is thinking of replacing a particular machine whose cost price is Rs. raat % a ar Tne cree ‘the machine is only Rs, 200. The maintenance costs are Year We? | Bap 4 5 6 7 \ 8 Maintenance cost | 220 | 500 | 800 | 1200 | 1800 | 2500 | 3200 | 4000 Determine when the firm should get the machine replaced. {INTUB. Tech. (CSE) 97/S] Solution + ‘The calculations of average running cost per year during the life of the machine are shown in the following table : zh @=@-@| @=z4 |M=6+6 12000 “990 12920 iain 720. 12720 12000 13520, 12000 14720 16520 From the above table it may be noted that je average cost per year, ATC ‘minimum in the sixth year (Rs. 3170). And this average cost is increasing from 7° year ‘onwards. Hence the machine should be replaced after 6 years. . WLLUSTRATION - 2 A plant Manager is considering replace! estimates the following costs in Rupees. ment policy for a new machine, He 6 Year = 190 | ‘Replacement cost at beginning of year_| 100 eal o [Salvage value at end of year oe [a0 2s ae Operating Costs Find an optimal replacement policy and corresponding minimuny TAY 4.24, 945)Solution : t of the machine are shown in the lig ‘The calculations for replacement sable ing. |Commulative} Total Cost Resale value| Net Value | OPES |""punning |C-S+2 2, | agree ‘Cost 6) _| Gost =R, atc ™ (6) = (5) | (7)= (4) + (5) (6) 6 a nae ® | ee 25 25 From the above table, it may be noticed that the average cost per year, ATC, is minimum in the 2" year, i¢., ATC is Rs. 57.5 which is less than ATC, (Rs,65) and ATC, (Rs. 130/-). Hence the machine should be replaced at the end of second year. ILLUSTRATION 3 A fleet owner finds from his past records that the cost per year of running a vehicle whose purchase price is Rs. $0000 areas under: Year 1 2 3 4 5 6 7 KunningcostRs. | 5000 | 6000 | 7000 | 9000 | 21500 | Teoaa 18000 | Resale Value Rs. | 30000 | 15000 | 7500 | 3759 2000 | 2000 | 2000 | arte Me running costs increase by Rs, 2000, but resale value remains constant Rs. 2000. Atwhat age is areplacement due? 3 GNTU ByTech. (Mech.) 97/CCC, (ECE) 97/CCC| Solution :42,500 16,250, T | 16,000 OU — DKS | 27,000 | 79280 198125 48,000 48,50 DH mn 48,000 48,000 ASH 11250 LHI 82,500 | 190800 48, Joaso0 | 1M 124500 17060) ‘The machine should be replaced at the end of 4 year or at the end of year if it is not replaced at the end of 4 year. ILLUSTRATION 4 Machine A cost Rs. 45,000 and the operating costs are estimated of Rs. 1000 for "the first year, increasing by Rs. 10,000 per year in the second and subsequent years. Machine B costs Rs. 50,000 and operation costs are Rs. 2000 for the first "year, increasing by Rs. 4000 in the second and subsequent years. If we now havea machine of type A, should we replace it with B? If so when? Assume that both » machine have no resale value and future costs are not discounted. Solution : The calculations of average costs running per year during the life of machine Aand B are shown in tables give below. TABLE : CALCULATIONS OF AVERAGE RUNNING COST FOR MACHINE A. Total Cost (Rs.) | Average Cos (Rs) TT Rs ATC, ‘Cost (Rs.) cs (4) | (5) = (3) + (4) 1 @=6)/() 45,000 ] 46,000 46,000 45,000 | __ 87,000 28,500 yearis ; the average running cost per Dee ee io. ene, machine ine A should be replaced after everyiene ee hanger oi armel ce mente eg ire sau aoe rn acter ane tie creche Tettesmat ohare sorigon vnpige ni = ‘= 11,000 = 21,000 = 31,000 Yer Teal coninasred $6.00 cy Machine shouldbe replaced by machine Ba the time (age) when itsrutig “ont forthe nex year exceeds the lowest average running cow (Rs. 2,000) erat of machine B ‘Caelason show that he runing cot (Rs 21,000) of machine Ain be yearinmorethan loves in aerage cont Rs 20.00) per ofmachine Hence EASE ‘Asbo be replaced by machine B afer te yor. Practice Problems 1. The con oa machine Rs. 6100 and ts scrap value i only 100-1 maintenance cous are found fom experience 1 be —_ ttetststsleta] [Geatrennce cox ms | 100 | 250 | 400 | 00 | 00 | 1200] 600] ‘When should the machine be replaced ? ru oie)! Answer : At the end fst year Rs. 1588.38, Oe an for te ‘Rs, 200 for the firs i a, frock pe A Re msi ee Ct ‘owning and operating rie lowe ms ting comsare Re gat” Ta eat The uc ome taser MI ie replaced B ope mes esos pnsver! Al EV Sd yeas be years truck B (RS 5733 gynt2 be tansy Tower than that Te ee Acoma replace Truck A by Trad pt Yom tay 3. (@) Machin css 5 pa tt yest and then cee ye 2 cent ae At which to replace the maine tf folowed what wile te eng Paes eae machine? dager ee (b) Machine B cows Rs. 1000 fratyeay and en cent Seve ee oftyped whichis oe yard Shaye rer ee = 5) Total comin he dyer Topo in te 150 een (b) Average annual connate ed Sy Tsk on 2 for year old machine dena st Sams vr (machine Bunt cond yer, ree ri x year 4 Afr considering replacement arch ow ts 2 a Sap ale Re 20, The mine 0 od Experience tobe as fall — Teleport ver | 1 [isis ee “ammo comm) {200 | oo | | | Sy a an pense Annver: Replace nthe end of DEEDY 5. Thefollwing ale gies ena ‘equipment whose purchase pee Anewer: de? mote ‘Atwhat year is the replaceme cA : qe Answer : athe end near ST‘operations Research : Theory ang strom is past records hatte maintenance ony pe 300, are given below Ne Pe Anower + Replace mt he end ofthe Sth Year 7 A eet owner Hinds ror is pas records thatthe oss Per Year of unig cane wos purchase pice is Rs. 5000 areas under 0. answer (9 Machine Acoma, and then incene by Ry gp oP ‘ites der ec » voter machine Bei aang _ ning ot er hg Replace machine Ay machine 8 he ea 1 euck with HI CO OS 500 a dae “ a shown below. ee pon ee eee Temangcomins | 600 | 600 | 700 [ ooo | 60 | 1600 [ 100 cee ms) | 3000 | 1200 | 750 | 375 | 200 | 200 | 200 “Thereafter running cot increases by Rs. 200 but resale vale remains conan, IRs 200, Atwhat age is replacement duc? = ay a Annuer: Sethe end of Sh yar . Atruc owner from hs past experience estimated that the maintenance ox Arve ra cue who purchase prc is Rs, 150000 and the ese vat = sao wow Tie Ta — ie tai a 7 ate Fe 1.000 | 2,000 | 2 000 | 20000 saan oe “Assume no interest charges, Find ag fr repence. 9 wa Annaer After syeats Ealoalte arto sar ane 1 ining sachin whe pure pu 6 er ra geen | [seem | | a | | oe ed { 1000 ‘1200 | 1400 | 1a00 | x00 | too | san _ 0} oak ano 00 [500 z oman [so ase) sno | r00 | enero [a [ise fine ee gee te Deri ich ie profit repace oi en Determine awhat ages aepbemet sen peach 70 9) Anroer: Though the minizaum valve of the average cot occurs atthe end of ear, is impractical to replace the wack every year, so next time Trini average cos occurs atthe end of th year. Hence tis bets}? replace the ruck fer every 4 years. min ay 4, ma cone wh a= ar machine coms Rs. 10,000 operating coms are R50 per year for he fie = con are Rs. 50 per year ‘In thesiath and succeeding years operating costs increase by Rs. 100 pet Find optimum length of cme wo hold the machine before replacing 70 cece) Annwer: Ed of 15 years. re ner : The machine sho be repcedat he co HO 18, The machine wer as three sal cin PSST tis tie Indcon per yar of aig a Ha Seopa soe rue Fpeochae pie Re 00 ith SO Pe et TckmeeotnainngcoseaereOperations Research : Theory ang p,, 132 + of flexibility due to fewer machines is of no inp, fave sufficient work for three of the old machi, ines, ‘an Uae (4 es should be replaced after two years, ‘Assuming that the los and he continues to hi should his policy be? “Answer : All the three small machin increased their costsas they continue in service due to ine, costs (gas and oil) and increased maintenance (repairs, 500 and the trade-in value drops as, ated, 16. Fleet cars have i ms direct operating batteries etc.) The initial cost is Rs. 3, passes until it reaches a constant value of Rs. 500. Given the cost of operating, maintaining. and the trade-in value, determin. the proper length of service before cars should be repalced. Year of service Year end trade-in value Annual operating cost ‘Annual maintaining cost (INTO (Mech. & BCE) 98/3/cer] Answer : The cars should be replaced at the end of the third year. 10.5 Replacement Policy for Items When Money Value Changes With Time Money value changes with time. Suppose you keep Rs. 100 in a bank which gives you an interest at the rte OC TORE pa. Afr one Year you will recieve Rs Hi ‘Thus we can say that “if we have Rs. 100 today, it i aving Rs. 110 after one _ Sea" Similarly, a rupee possessed today is worth 1.1 after one year @ 10%. In the other way, if Rs. 1.10 after one year is Re. 1.00 today, Re. 1.00 after one year will be 1/1.1 or (1.1)! today. 7 Ina similar fashion one ry two years pee today will be (1.1) sears hence because itis 1.1 after one year and 1.1 x 1.1 in the next ie eC “Thus a nipee two yea hen 2 ence is worth (1:1)? today. Thus the present worth of one rupee, n years hence =u vo + 0.10)" today, when money value is changing @10%. or ifthe money value is supposed tobe changing at the rate ofr pene Z Present worth of one rupee, n years hence will be a +H or Saeed eePresent Worth Factor (PWF) : It is the factor that converts a rupee ‘n’ years hence changing (money grous but value decreases) at the rate of 'r’ percent is worth today. This is denoted by v = (1 +r) WO This is also called "discount rate" or " r “de reciation rate" or or “present value factor", — Now let = Initial cost of the equipment and if Ry = Operating cost in first year, (present worth is also Ry) “-—~ if Ry = Operating cost in second year present worth of | —— Rg= (1+)! Ry orv Ry if Ry = Operating cost in third year, and present worth of , ~ Rg =(1 +1)? Rg or v? Ry and so on if R,, = Operating cost in n year present worth of =~ Rev R, ‘Thus the present value of all future discounted cost in ‘n’ year assuming scrap value of the equipment be zero, is +ve-lR, ae P,=C+R,+VRg+V? Rg... ‘Thus P, is the amount of money required to pay all future costs of purchasing the equipment and operating it assuming that it is to be replaced after ‘n” years. Now if we assume that the manufacturer invests the amount P,, by borrowing at the rate of interest ‘r’ and repays it in ‘n’ years with a fixed annual instalment ‘x’ on diminishing balance, nal Then P, =xtvatvext....¢V lx a[levev% ....¢v" x [} [Esp Hence the best period to replace the machine is the period n which iii 45. p,. But 1 = v=A positive constant quantity y and so we can write Fy = vO aie ~ and find out the value ofnthe period at which to replace the machine that minimises _ Fy Since n can assume only discrete values [1, 2, 3, ..-]we ‘can use the method of finite differences | to calculate its optimal values. —TRL F,will be minimum if A Fy <00 l-v ba Beer Pal ie or Ragy * > i {a-vya-v] or Ry gy> St RItV Ret VERG +. tv" TR, levevea lg yent CHY RWI or Ray > a @ rw rel ‘The right hand xpression is the weighted average (denoted byu,) ofall cos up to and includin, , 8 Period (n — 1), i 2 yal isco factors applied to (n~ 1). The weights 1, v, v2, yt-! are the the costs for each periodwe — From equation (f), i i eq , the left hand side of expression can be expressed as C+ Rv! Rye <—St * (h) rv oral From equation (g) and (h) we conclude that 1, ‘The machine should be replaced if the next period cost is greater than the weighted average of previous costs. : . The machines should not be replaced if the next period's cost is less than the weighted average of previous costs. Note: When money value is not considered, v = 1 C+R,+Rgt+..R, - ton terms average yearly cost with no resale value. P, P, or Ryy1>— 7 where—* This is identical to the previous case when money value was ignored. In real practice replacement policy is greatly influenced by complicated tax laws prevailing. Discussion in this regard is not included in the scope of this book. In actual dealings the influence of tax has got to be taken into consideration. Steps to Find the Policy when Money Value Changes with Time : Step 1: Note the values of capital cost of machine, salvage value, rate of depreciation PWF etc. Step 2: Construct the tabular form as given below, and enter the first 2 columns as per | Average Annual Total Cost? C, C+rR,v"" (4) = (2)- 8) | 6) =.C+E 4) (7) = M6) ——— and Step 3: Calculate the present worth factor for each year by the formula 79-1 put in col. 3. Step 4: Calculate R,, v"~ 'ie., the product of 2nd and 3rd col. values, and enter them in col. 4.ILLUSTRATION S Solution : Step 5: Col. 5 is sammation of cummulative running cost and capital cog jp Stig (salvage if any) Le, C+ ER, v4! Mchoding Step 6: Find cummulation of col. 3. and enter in col. 6[ v"~ 3] Step 7: Calculate the value of col. (5) divided by col. (6) i-e., (c + ER v ew. and enter in col. 7. Step 8 : The lowest value in col. 7_corresponds to the year in which the machine is be replaced. — 7 » Soudents ane advised to check the problem thoroughls-and nate whether depreciation is pie, : Note The initial price of equipments Rs. 5000. The running cost varies as shown beloy, | Year 1 2 3 4 5 6 7 | Running cost (Rs) | 400 | 500 | 700 | 1000 | 1300 | 1700 | 21m Taking a discount rate of 0.09. Find out the optimum replacement interval. Year=m | Maintenance Discount | Discount cost | * | os cost=R, | factor=w-! | Rw! lc+pRvt| Eve! _ . | ral r= (2) @) | (4) = (2)- (3) | 6) =C+E(4) | (6) = £03) m-2 { © 400 1.000 | 400 5400 1.000 5400 soo og. | 450 5850 1.900 3079 | 567 2368 729 2083 | __ 853 1983 “S306 192 0.581 fas From the above table, we observe that ATC; > ATC, < ATC, ie., 1953 > 1921 < 1936 the optimum replacement period is 6 years. PLLUS TRATION, @ A manufacturer is offered 2 machines A and B. Ais priced Rs. 5000 and running costs are estimated at Rs. 800 for each of the frst five yenrs increasing bY BS iy per year in the sixth and subsequent years. Machine B which has the same as.A with Rs, 2500 but will have runriing cost of Rs. 1200 per year for 6 increasing by Rs. 200 per year thereafter. If money is worth 10% per yea" machine should be purchased? (Assume that the machines will eventually be sold for scrap at a negligiblePr? e [JNTU Mech/Mech:vw Golution + ~ ABLE FOR A ) = 0-904 r#10% — Cy=5000 veo R, vel ~ Rv! * * 5 C+¥ERv yw 6 = a 0 @) @) M=@xM) | @rc+Ew | Gre | M=96 yo 800 1.0000 800 5800 1.0000 5800.00 Q 800 0.9091 727 6527 1.9091 3418.88 3 800 0. 8284 | : 661 ‘7188 2.7355 2627.67 4 800 0.7513, -, 601 7789 3.4868 2233.85 5 800 0. 6880 546 8335 4.1698 1998.89 6 1000 0.6209 621 8956 4.7907 1869.45 7 1200 0.5645 677 9633 5.3552 1798.81 8 5.8684 From table for A 11548.15 ATCg (1763.88 > ATCg (1751.72 ATG (1680 29 Cakuiate total cost of group replacement including individual replacementspy aching step Sand step 4 Sop @) Calculate the average cost per period by dividing the result in step 5 with penog umber Seep Ts denny the least among the average cost per period as the period of group replacement policy, TaatTioa |? —--——— 1000 duels are in use and it costs Rs, 10 t0 replace an individual bulb which has dure out, [fall bulbs were simultaneously it would cost Rs, 4 per bulb, replaced. Enis propesed te ce all bulb's at fied intervals of time, whether or not they ave burnt out and to continue replacing burnt out: asand when they fail. The failure rates have been observed for certain ype of light bulbs are as cs 50 At what intervals all the bulbs should be replaced? At what group replacement price bulb would a policy ic indivi price Seed — as policy of dividual eran eer tion + Step 1: To find out the probability of failure of items at the end of each week. The probability of failure of light bulbs in first week 10 = Pre zog soto ‘The probability of failure of light bulbs in second week. = Py S1D Pee 99 7 0-15The probability of failure of light bulbs in third week (50-25) 0 of 0-25) 0.28 joo = 0% ‘The probability of failure of light bulbs in fourth week =Py= The probability of failure of light bulbs in fifth week = Py = (100-80) _ 6 100 0.20 Sum of all probabilities is 1, ie, PL+ Pet Py+Py+ Peal All further probabilities Ps, P,, Pg and so on will be zero. Step 2: Calculation of number ‘of rey ‘placements made considering previous replacements, ep Let N;; be the number of replacements made at the end of # week, if all 1000 bulbs are new initially. Thus No=No= 1000 Ny =No P; = 1000 x 0.1 = 100 No =No Pq + Nj P = 1000 x 0.15 + 100x 0.10 = 160 Ng = No Ps + Ny Pp + Ng P; = 1000x 0.25 + 100 x 0.15 + 160 x 0.10 = 281 Ng=NoPy+N,Ps+NoPo+NgP; — =377 Ng = No Ps +N, Py +No Py +No Py +Nq Py = 350 Ng = 0+Nj Ps +No Ps + Ng Ps + Ny Po + Ns Py = 230 Ny = 0+0+No Pyt Ng Pq +Nq Ps + Ns Pp +NoP} = 286 iti Ibs burnt out increases upto fourh week See keel sol sole start increasing. The whole system comes to a steady state where the proportion of bulbs failing in each week is the reciprocal of their average life. As the mean age of bulbs. = 1X P) 42x Pot 3X Pgt 4 Pyt 5X Ps = 1x 0,1 42x 0.15 + 3x 0.25 +4 x 0.30 +5 x 0.20= 8.35 week. ~ —Step 3 Step 4: Step 5: Step 6: Step 7: 1000 number of failures in each week in steady state become = “5-3 = 299 cost of replacing bulbs individually only on failure = 10 x 299 = Rs. 2999, Calculating the cost of individual replacement at the end of each period coy vidual replacement at end of first week = 100 x 10 = 1000 end of second week = 160 x 10 = 1600 end of third week = 281 x 10 = 2810 end of fourth week = 377 x 10 = 8770 Calculating the cost of group replacement at the end of each period. end of first week = 1000 x 4 = 4000 end of second week = 4000 + 1000 = 5000 end of third week = 5000 + 1600 = 6600 end of fourth week = 6600 + 2810 = 4410 Calculating total cost of group replacement including individual replacement iLe., adding values of step 3 and step 4. end of first week = 4000 + 1000 = 5000 end of second week = 5000 + 1600 = 6600 end of third week = 6600 + 2810 = 9410 end of fourth week = 9410 + 3770 = 13180 of ir Calculate average cost per week end of first weel -m = 5000 end of second week = 52%? « 5309 end of third week = 41° « 3136.67 end of fourth week = His = 3295, To identify the least among average cost per period. Ivis identified a third week. ie, 3136.67, soit would be optimal to replace all the bulbs after every 3 weeks, other wise the average cost will be increasing.puUSTRA TION © 8 A has a large number of bulbs all of whi is is factory rier pret base l af which must bein working condition. The Proportion of Bulbs Failing During the Week [INT (Mech) 99] solution : N, =N, P; = 1000x 0.1 = 100 bulbs Np =N,P, +N, Pp = 100x 0.10 + 1000 x 0.15 = 160 bulbs Ng = No P +Nj Po +N, Ps = 1600.01 + 100x 0.15 + 1000 x 0.25 = 281 bulbs Nq= Ng P, +No Po +Nj Py +N, Py = 281 x 0.1 + 1600.15 + 100% 0.25 + 1000x 0.35 = 427 Ng =NqP,+Ng Po +No Ps +NqPyt+NoPs = 427 x 0.1 + 281 x 0.15 + 160 x 0.25 + 100x 0.35 + 1000 x 0.12 = 279, Ng = Ng Pi +.Ng Po +Ng Ps + No Pq +N Ps +N, P5 = 279 x 0.1 + 427x 0.15 + 281 x 0.25 +160 x 0.35 + 100 x0.12 + 1000 x 0.03. = 260 bulbs.Tenmmminve] Gono |Gouatgeny | Toa aed [ae] Estes SORE ages +e sof a 260 on 1200 2110 “10 | asshole plc yh nd of cry $4 eth Practice Problems 1. Find the cost per period of individual replacement policy ofan installation of 300 ighting bulb, given following i) Cou of replacing individual bulbs is Rs. 8. i) Conditional probably of flue is given below ofite] 7 sau (ot) 91 ofaya ws “Conceal probable Anouer Expected life ofeach igh bubs 3 wek and the average cost of indi eplaerenit Of S00 ight bulbs RS. 206. 2, Aneleco: company which generates and dibs et tn thee fps. The appropriate Le dam ae given in elats trict conducted so he allowing ble 21” wilt Youve |) 2?) ss] 6 Perens pole ing 71] 1 campy sows 00 pes and follows policy fre oles ny we ey fal how may pes ae expected ober fac ar dag tenet enya (i) ie cot epic uy 160 per pola i 2 ‘common group replacement policy, i costs Rs, 30 per pole: Find 0M ‘pm prod pop replace fr en 1 Anse) 993 pokes Al poles afer ih year PEER eee ted se cn of plo en ity Tbr amangt tain service. If the cou the total number of bulbs i 1b emeneg Ha replacement? ae ne ee ‘aha poner: Replacement atthe endo third week 4, Suppose that a special purpose rpe oj pager tie tet {pnd the cos per bul ora grup el pce aera Isicheapest to replace all bulbs; @ Individually. i) Every week. (i) Every second week, (G0) Every third week dsnver: Individual replacement. 6 The probability P, of failure just before agen are shown bel. : nae india replacement costs Rs. 1.25 and group replacement css Re. 050 etm fd (ma inna pepe al diye Ts 7T«?s[o]7]e]e]e[a wo ate] oor | wer [ou fais | oF [ow [ow =o Nite ‘Ancuer : Replacement after every weeks Stas been suggested bya dats poo ns data processing fm that hy net 3 Fl Peoaly eping sf ce Ilo miss ran eto | "pe of tube i known to have a mary bien (RH shown inthe folowing bl ere vee 213 Pest of lure or [or | of | 98 come The con ofreplacn na si 7 oe caper tbe Fe parent pay EES the con of preventive repack . 4 week aloog oh kis optimal to have a group replacement after 7 individual replacement ee