Refresh Your Equipment Replacement Decision-Making Skills

1.1. INTRODUCTION Despite indications of a general economic recovery in the U.S. during the mid-19801s, mine operators have not generally shared in the benefits of these reported better times. Budgets have not rebounded, borrowing is tougher, parent companies' pockets are not as deep as in previous years, and margins are not any better -- if there is any left over at all. Managing capital equipment budgets is always a challenge, and the last five years of stretched equipment lives make these decisions more tenuous. Delays and avoidance of replacements due to tough times inevitably makes those decisions increasingly difficult and usually more expensive The purposes of this paper are to present. a brief refresher outline of the fundamentals of equipment replacement analysis, to suggest a number of papers where analysis methods are explained in greater detail. and to recommend the use of a widespread microcomputer software capability (1-2-3) as the easiest path to a much-needed solution for a very difficult, and usually under-supported management decision problem 2. REPLACEMENT DECISION POLICY Investments in equipment replacements must compete for capital with all other investment alternatives. Capital for replacements of ten represents a greater commitment than do the new projects which a company might handle in a given year. But. sadly, formal policies for standardized analysis of replacements rarely exist, even in major companies. Yet this policy can be very significant in determining the competitiveness of a firm. Whereas many replacement decisions are based on cost minimization, economists and financial analysts agree that wealth maximization or return on investment is the superior criterion. Though the difference may seem slight, agreement on a firm's financial objective is vital. Replacement policy should be straight- forward. have a logical basis, and a proper level of sophistication. There are several reasons to develop a policy for replacement decision-making: [I] 1 - equipment's optimal economic life is nearly always shorter than its physical life; 2 - mine life often exceeds equipment life, so management must face these decisions routinly 3 - replacement capital costs, on an undiscounted basis, can run 25 to 75% of original capital 4 - technological changes may result in a newer machine or system which can operate more efficiently, more safely. or less expensively 5 - estimates should be made consistently in the fundamental areas of life expectancy, availability, utilization. price escalation, taxes 6 - long-term and short-term budgeting without decent data and analytical capability is nearly impossible, or at least ineffective Policy development assumptions which must be considered include: the planning horizon, cost patterns, interest rates, availability of capital, replacement vs. expansion, technology advances.