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UBC Theses and Dissertations

Optimum life of production assets in short and medium term timber harvesting projects Oyugi Ogweno, Donald C.


An optimal equipment replacement model was developed, that is useful for evaluating machinery replacement proposals. The model is based on discounted cash flow methods, and performs the evaluation by comparing the cash flow profile of the currently owned machine (the "defender") against that of a proposed replacement (the "challenger") over a finite time period. The optimum time to replace the defender is determined as the age which will maximize the net revenues from operating both machines over the planning horizon. Real time data were collected from the operation of similar machines, and used to estimate repair and maintenance costs, machine resale values, and machine operating costs. These costs were then discounted to a base year, and aggregated into cash flow profiles. The cash flow profiles were then converted to annual equivalents, which form the basis of the replacement decision. A method of estimating the rate at which a group of machines accumulate technological obsolescence was developed. These estimates are made as a function of the improved ratio of productivity to fuel consumption of new generations of machines over older ones. The replacement model was encoded into a microcomputer spreadsheet application program, that is useful as a financial planning tool in short and medium term timber harvesting projects. The program is interactive, and can be used to evaluate the sensitivity of the proposed replacement to different economic parameters. Sensitivity analyses was performed on the computer model by varying six of the input variables. From the results, it was concluded that the optimum life was relatively insensitivity to changes in most of the inputs. The cash flows, however, was highly sensitive to changes in most of the input variables. Changes in the length of the planning horizon had the highest effect on both optimum life and cash flows of the assets. The value added cost of the product had no effect on optimum life, but a very high effect on cash flows.

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