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Replacement Theory – Introduction

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It is very important as well as necessary that older equipment and items like refrigerators, lights, any kind of industrialgadgets, heaters and other objects are replaced in an old plant. As every item have a designated performance time (maybe in months or years or even in hours) for a certain number of operations, this replacement is required.

For example, a manufacturer knows that when the production of a certain product like heater has a warranty period of 6 years.That equipment (heater) will provide its user that desired level of efficiency. He also knows that the chances of breakdown will be minimalin those years.

In the same way, lights (tubelights or bulbs) are created to be operated on a certain number of on and offs. It may be 10,000 times or more than the estimated number.

But after its performance period comes to an end after a certain number of operations, replacement of all of these becomes necessary. There are also certain reasons why these equipment or machinery are required to be replaced. Few of the important reasons are:

  1. The equipment fails to operate and doesn’t perform the function for which it had to be purchased.
  2. There had been some degradation of that equipment and to perform well,it needs repairs which are highly expensive. These repairs are only required when damage is beyond any economic repair situations. As these equipment age with time, the cost involved in its repair and maintenance also increases with it. Only when such costs on maintenancebecome uneconomical to be continued, replacement of such equipment become necessary with new ones.
  3. Items are utilised for a selected period, and the expectation of its failure becomes evident.

4.With an improved technology over the years, organisations have better access to excellent products which are easy to use and utilises less power to function.Although these machineriesare providing the organisations witha fruitful result, it is also being counted as a reason for degeneration.

The reason for equipment replacement is not because of its performance level which is designed to a certain standard. The main reason for its substitution is the purchase of new equipment which is capable of a higher level of performance.

One should keep in mind that all the decisions involving in equipment replacement are based on high financial cost. There are various factors on whom the financial decisions rests. Some of the factors are like,

  • Value of the funds available
  • Tax benefits
  • Cost involved in the purchase of new equipment
  • Government policy
  • Total costing involved in the arrangement of funds, and much more.

Few assumptions are required to be made by the management before they make any replacement decision. Some of these decisions are,

  • No changes take place in the maintenance cost.
  • There are no changes on output quality.
  • The standard remains the same for the effective performance of equipment.


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