Heavy construction equipment replacement economics

Optimal machine replacement is critical to the survival of contractors operating in the equipment intensive fields of construction. This study presents a replacement analysis method which, while simple enough to permit application by a medium-size construction contractor having a limited cost data system, is still based on sound economic theory. In support of the development of the analysis procedure the nature of a construction company's operating environment is examined. Based on that examination a cost minimization technique was identified to be the most appropriate analysis method. Because the analysis process incorporates present value procedures it was necessary to establish the correct interest rate factor. This question was explored and it was determined that the proper interest rate is the cost-of-capital rate for the particular firm making the analysis. A method for calculation of this cost-of-capital rate was, therefore, included in the study. The analysis procedure presented is intended for practical application by those charged with equipment management responsibility. It is presented in the form of a set of replacement-decision cost factors and their respective mathematical formulas. The only requirements for application are normal corporate accounting data and equipment utilization and expense records. However, better record keeping will provide data for more accurate predictions. The structure of the analysis is that of investigating each replacement factor as an isolated cost. This format facilities sensitivity checks of different assumptions or policies. The analysis yields an optimum replacement timing cycle and a corresponding equivalent annual cost. To check the analysis' application, input data was obtained from three construction companies and typical analyses performed. The analysis method proved compatible with the current record keeping practices of all the firms queried.