Economic Life of Equipment: Derivation of Formulas for the Selection and Replacement of Manufacturing Equipment Which Depend Upon the Theory of Economic Utilization of Capital Resources

Abstract

Abstract The correct solution of the problems of how to select and when to replace equipment is vital to industry. In fact, it revolves about the larger problem of how to invest economically and profitably the capital resources of any enterprise. Many rule-of-thumb as well as a number of somewhat more exact methods are now being employed as a basis for determining equipment policies; however, no one of them is suitably adapted to the present needs of industrial executives, process engineers, plant managers, and sales executives. Accordingly the A.S.M.E. sponsored a research project to investigate thoroughly this subject and formulate the principles upon which any equipment policy should be based, and out of which practical technique can be evolved for the ordinary purposes of industry. As a result, this paper, which constitutes the formal report on the project, presents criteria for the economic or useful life of equipment, for the determination of depreciation policies, for the ultimate ability of equipment to produce earnings or profits, for protection from the hazard of impending obsolescence, and for the guidance of equipment manufacturers in the evolution of new designs and in anticipating the needs of industry. All of these criteria depend upon the relative economic superiority of some proposed type of equipment over some equivalent existing type or one chosen as a standard of comparison, and the evaluation of each can be achieved through formulas which are equally applicable to machine tools, jigs and fixtures, labor-saving or material-handling devices, process and power equipment, and even buildings or structures. Moreover, in the course of the investigations, many other important facts were discovered which relate to financial policies, accounting practice, the origin and proper methods of treating overhead, plant layout, maintenance, productivity and idle time, salvage and resale policies, machine design, and, in general, the earning power of the enterprise; all of which are discussed in detail.