Replacement/Retention Analysis

Abstract

This study is the result of the plant's recent customer complaints regarding the leakage of one of our customer's products. The compound, which after being baked in the oven becoming a gasket, is applied inside the closures using 20+ old machine, Liner 1. The objective of this project is to perform a retention/replacement analysis to determine if Liner 1 needs to remain in production or be replaced by a new liner, Liner 2. Two different replacement analyses are performed in this project. The first analysis determines the economic service life (ESL) for the defender and challenger using the total annual worth of costs. The defender has an estimated retention period of five more years with a total annual worth of costs equal to -$27,315.01. The challenger instead, has an estimated retention period of twenty years with a total annual worth of costs equal to -$37,879.82. Since the defender has a lower cost at year five than the challenger, it should remain in production for the next five years. The second analysis calculates the cash flow after tax (CFAT) annual worth for both the defender and challenger to determine which liner has a higher cash flow. The CFAT is using the ESL of the defender and challenger. The CFAT annual worth of the defender is -$16,498.79. The CFAT of the challenger is $37,141.08. Since the challenger has a higher cash flow, the defender should be replaced by the challenger.