KEVOS® MAKEOS · Money
Machine Economic Life Check (Year-by-Year EUAC, Minimum-Cost Life, Keep or Replace)
How many years should a new machine be kept before replacing it to give the lowest equivalent annual cost, and is it cheaper to keep the existing machine for one more year?
Economic life of a new machine (the challenger): its equivalent uniform annual cost for every life from one year to the longest you examine, from the price, a resale value that falls each year, a running cost that rises by a yearly gradient (capital recovery, sinking fund and gradient factors, as the interest factors tool), the life with the lowest cost and that cost, then the cost of keeping the existing machine (the defender) for one more year from its fall in resale value, the interest on its present value and its running cost, against the challenger’s lowest annual cost.
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How this tool works
Inputs, units and where to find them
| Input | Unit | Typical source |
|---|---|---|
| Price of the new machine (installed) | AUD | Installed price of the new machine, on the same GST basis as every other amount (ex GST for a GST-registered business). |
| Resale value after one year | % of price | What the new machine could be sold for after one year, as a share of its price (from dealers or used-equipment prices). |
| Yearly fall in resale value after that | % | How much the resale value falls each further year, as a share of the previous year’s value. |
| First-year running cost | AUD/year | Running cost in the first year: maintenance, repairs, energy and downtime cost. |
| Yearly increase in running cost | AUD/year | How much the running cost rises each year as the machine ages. |
| Interest (discount) rate | %/year | Your discount rate or cost of capital. |
| Longest life examined | years | Longest life to examine. |
| Existing machine (defender) | ||
| Market value of the existing machine now | AUD | What the existing machine would sell for today. |
| Market value of the existing machine in one year | AUD | What it would sell for in one year. |
| Running cost of the existing machine next year | AUD/year | Running cost of the existing machine over the next year. |
What each input means
Open an input to see what it is, its units, the worked example and the common mistakes, with a small diagram.
What this means: Price of the new machine (installed)
- What it is
- The full cost of buying the new machine and getting it running: purchase price plus delivery, foundations, installation and commissioning, which the capital recovery factor spreads over each possible life.
- Units and format
- Enter a number in AUD: Australian dollars. The form accepts 1 AUD or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 120000 AUD as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- The capital part of every year’s EUAC rises in proportion, which pushes the economic life longer.
- Get it right
- Keep every amount on the same GST basis; a GST-registered business normally works ex GST throughout.
What this means: Resale value after one year
- What it is
- What the new machine could be sold for at the end of its first year, as a share of its installed price; the first and usually biggest drop in value.
- Units and format
- Enter a number in % of price: % of price. The form accepts 0 % of price to 100 % of price. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 70 % of price as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher first-year resale lowers the capital cost of every life, most of all the short ones.
- Get it right
- Base it on used-equipment prices for similar machines, not on the tax depreciation schedule.
What this means: Yearly fall in resale value after that
- What it is
- How much the resale value falls in each year after the first, as a share of the value at the start of that year, so the value declines geometrically with age.
- Units and format
- Enter a number in %: percent: the number is read as a percentage, so type 8 for 8 %. The form accepts 0% to 100%. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 15% as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A faster fall raises the capital cost of the longer lives and so shortens the economic life.
- Get it right
- A 15 % yearly fall halves the value in about four and a quarter years; check it against real resale prices.
What this means: First-year running cost
- What it is
- The cost of running the new machine in its first year: maintenance, repairs, consumables, energy and the cost of breakdowns, excluding operator wages that do not change with machine age.
- Units and format
- Enter a number in AUD/year: money per year. The form accepts 0 AUD/year or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 15000 AUD/year as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Adds the same amount to the EUAC of every life, so it changes the lowest cost but not the economic life.
- Get it right
- Count only costs that differ between keeping and replacing; wages for an operator needed either way cancel out.
What this means: Yearly increase in running cost
- What it is
- The amount by which the yearly running cost grows each year as the machine wears, the uniform gradient that the gradient factor turns into an equivalent annual cost.
- Units and format
- Enter a number in AUD/year: money per year. The form accepts 0 AUD/year or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 3000 AUD/year as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A larger gradient makes long lives more expensive and shortens the economic life.
- Get it right
- Estimate it from the maintenance history of similar machines; with a gradient of zero only the fall in resale value sets the economic life.
What this means: Interest (discount) rate
- What it is
- The yearly rate at which future costs and resale values are discounted to make them comparable with money spent today: your cost of capital or the return you require.
- Units and format
- Enter a number in %/year: %/year. The form accepts 0 %/year to 100 %/year. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 8 %/year as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher rate raises the capital recovery cost and lowers the weight of distant running costs.
- Get it right
- Use the same rate the business uses for other investment decisions; 0 is accepted and treats money as having no time value.
What this means: Longest life examined
- What it is
- The longest ownership period the tool evaluates; the EUAC is worked out for every whole year from one up to this life and the lowest one is reported.
- Units and format
- Enter a number in years: years. The form accepts 1 years to 40 years. Use a whole number. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 15 years as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Only limits the search and the table; it changes the result only when the lowest EUAC lies beyond it.
- Get it right
- If the result says the lowest cost is at this life, the true economic life is longer: raise it.
Existing machine (defender)
What this means: Market value of the existing machine now
- What it is
- What the existing machine would fetch if sold today; keeping it gives up this money, so the interest on it and its fall over the year count as a cost of keeping.
- Units and format
- Enter a number in AUD: Australian dollars. The form accepts 0 AUD or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 30000 AUD as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher value raises the cost of keeping the old machine through interest and lost value.
- Get it right
- Use a realistic sale price less selling costs, not the written-down book value.
What this means: Market value of the existing machine in one year
- What it is
- What the existing machine is expected to fetch if it is kept for one more year and sold then; the drop from today’s value is part of the cost of keeping it.
- Units and format
- Enter a number in AUD: Australian dollars. The form accepts 0 AUD or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 24000 AUD as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A lower value next year raises the cost of keeping the old machine one more year.
- Get it right
- It must not be higher than today’s value; enter 0 if it will be scrapped with no value.
What this means: Running cost of the existing machine next year
- What it is
- The cost of running the existing machine over the next year: maintenance, repairs, energy, scrap and downtime, on the same basis as the new machine’s running cost.
- Units and format
- Enter a number in AUD/year: money per year. The form accepts 0 AUD/year or more. Required: the tool does not calculate until every input is valid.
- Example
- The form opens with 32000 AUD/year as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Adds directly to the cost of keeping the old machine, so a high value points to replacing now.
- Get it right
- Include the cost of lost production from breakdowns, which often rises fastest in an old machine.
Method and formulas
- Resale after n years Lₙ = P × s₁ × (1 − d)^(n − 1).
- EUAC(n) = P (A/P, i, n) − Lₙ (A/F, i, n) + A₁ + G (A/G, i, n), with (A/P) = i (1 + i)ⁿ ÷ [(1 + i)ⁿ − 1], (A/F) = i ÷ [(1 + i)ⁿ − 1] and (A/G) = 1 ÷ i − n ÷ [(1 + i)ⁿ − 1] (as the interest factors and EUAC comparison tools); the economic life is the n with the lowest EUAC.
- Cost of keeping the existing machine one more year = (MV₀ − MV₁) + MV₀ × i + its running cost; keep it while this is below the challenger’s lowest EUAC.
- Example: the new machine is cheapest kept 7 years at A$42,579 a year; keeping the old one another year costs A$40,400.
Limitations
- End-of-year cash flows, a constant interest rate and a challenger that repeats like for like; tax, inflation and technology change are not modelled.
- Resale value falls by a fixed share each year and running cost rises by a fixed amount each year; replace these with your own records where you have them.
- Example values are illustrations. Replace them with values for your actual task.
Typical uses
- Decide how long to keep a new machine tool or vehicle
- Decide whether to replace an ageing machine this year or next
- Compare a replacement policy with the budget
Who it is for
- Engineering managers
- Plant engineers
- Finance and business owners
What you get
- EUAC for each life and the economic life
- Lowest equivalent annual cost
- Cost of keeping the existing machine one more year
- Keep or replace
Interpreting the result
- The EUAC curve is usually flat near its lowest point, so a year either side of the economic life costs little more: other factors can decide within that band.
References
- Machinery’s Handbook, 29th edition (Industrial Press, 2012), printed pp. 134–143. Topic reference; no source tables or recommended settings are reproduced.
- Newnan D. G., Eschenbach T. G. and Lavelle J. P., Engineering Economic Analysis (Oxford University Press): replacement analysis, economic life and the defender’s marginal cost.
Learn the Concepts Behind This Tool
These KEVOS® Library readings explain the method this tool uses, with worked examples.
Useful alongside · Library collection
NPV, IRR and payback answer different questions: reading investment measures when they disagree
In Investment Appraisal and Business Cases
What it covers: One option has the higher return percentage and faster payback; another creates more value. How to read NPV, IRR and payback together, spot when IRR misleads and make the trade-off visible.
Also in Before you buy: challenge the need, then judge the whole-life commitment
KEVOS® tools are screening and decision-support utilities. Verify important financial, engineering, safety, legal or operational decisions using appropriate professional standards and your organisation’s approved data.