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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End to date, ams 990803