Justify asset replacement vs continued repair with defensible economic life metrics.
How does Equivalent Annual Cost (EAC) fairly compare assets with unequal lifespans?
Comparing total purchase price or simple payback fails because an overhaul may last 4 years while a new machine lasts 10 years. Equivalent Annual Cost (EAC) converts the Net Present Value of all capital, overhaul, and annual operating costs into a uniform annualized payment using the Capital Recovery Factor: CRF = i(1+i)^n / ((1+i)^n - 1).
Acquiring the new challenger saves approximately $7049 per year in Equivalent Annual Cost (EAC), driven by lower operating costs and longer service life.
| Hurdle Rate | Defender EAC | Challenger EAC | Recommended Action |
|---|---|---|---|
| 6% | $20658 | $12772 | Replace |
| 8% | $21058 | $14009 | Replace |
| 10% | $21464 | $15298 | Replace |
| 12% | $21877 | $16637 | Replace |
When aging industrial assets experience escalating breakdown frequency and repair bills, plant managers face the classic decision: overhaul the existing machine (the Defender) or invest capital in a new replacement (the Challenger). EAC provides an objective, mathematically rigorous financial framework for this decision.
Compare competing machinery tenders by Net Present Value (NPV) of full lifetime costs.
Cost & Economic DecisionsCalculate accurate cost per minute of unplanned downtime to support reliability business cases.
Cost & Economic DecisionsProve the financial return of reliability improvements, CBM tools, or storeroom re-engineering.