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ANALYTICAL SUPPORT FOR REPLACEMENT DECISIONS. A CASE STUDY
Jan A. Berg-Andreassen and Allen J. Dupont
International Journal of Transport Economics / Rivista internazionale di economia dei trasporti
Vol. 34, No. 3 (OCTOBER 2007), pp. 319-331
Published by: Accademia Editoriale
Stable URL: http://www.jstor.org/stable/42747828
Page Count: 13
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Technical/engineering aspects of the replacement decision are frequently analyzed in great detail. The economic and financial decisions are in most cases, however, based on assumptions that only time can verify. The reason for this inadequacy, aside from the inherent ex-ante nature of most investments, is partially that in the investment evaluations the tactical knowledge of the operational expertise tends to weigh in heavily at the expense of more strategic evaluations. The main problem, however, is the lack of reliable data for processes that will materialize only sometime in the future. This paper attempts to highlight a methodological approach that combines old operational data with the specifications of the new unit to achieve a better understanding on how the new unit will function and how to choose between the available renewal options. After the technical evaluations have limited the replacement alternatives, the economic analysis proceeds on the assumption that past economic and managerial processes and procedures will to a large extent also be applicable to the replacement unit. Armed with relatively simple theoretical tools, the unit cost curves, the remaining replacement options are compared. Applied to Acme Dredging Company, this comparison shows that within the ranges of the anticipated demand, it would be more economical for the decision makers to contract a new dredging unit.
International Journal of Transport Economics / Rivista internazionale di economia dei trasporti © 2007 Accademia Editoriale