The following are some of the reasons why assets can be considered to have reached the end of their lives:
· Technological Obsolescence, i.e. they are no longer needed or suitable for a useful purpose.
· Technological failure. i.e. no longer functional because of total or component damage, failure that ends safe operations, etc.
· It is economically sound to replace, i.e. the cost of a replacement is less than the cost of continuing with the existing asset, or the net profit available by replacement is higher than continuing to own and operate the existing asset.
The capital recovery cost of an asset tends to decrease as the amortization time increases.
The annual costs of operating and maintenance (O&M); repair and/or rehabilitation (R&R) tend to increase as the asset gets older.
Productivity may also decrease with asset age.
The net result of the above tendencies suggests that there should be an optimal life for an asset that can be used for planning and other purposes. In real life situations the effects of inflation, taxes, etc. cannot be ignored in the making optimal life estimates.
The function OPTL can be used to illustrate the process but it may not reflect many of the local situations which determine when an asset has reached the end of its life.
OPTL produces a table of average annual costs vs the life. These are not to be confused with the cost for the particular year of life as they have been smoothed by using the CRF by accumulating all the costs (and/or profits) to net present value and redistributing them to average annual amounts.
It should be noted that there is no guarantee that an optimal life will be discovered because the costs may not minimize, nor the profits peak during the technological life of an asset.
In such cases there are no alternatives to replacement or retirement when the asset has in effect failed for technological reasons even though the cost may be higher, or the profit less.
This latter situation is typical in many situations. Consider why you change private passenger automobiles. Typically the change cannot be justified on economic grounds. This is true for many types of productive hardware.
OPTL Utility function f279: ‘gf 279
This fn requires entry of a series of payments appropriate to capital assets such as machines, buildings etc. It calculates the equivalent annual costs of holding the asset for each period from one to the maximum allowable.
The optimum life is selected as the period which gives the minimum cost.
The reliability of this type of analysis is dependent on the quality of the estimates of future costs and salvage values.
The function can be used for replacement analysis by comparing the future costs of retaining a current asset (the Defender) with the optimum costs of a replacement (the Challenger).
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