Industrial Engine. Sanjay’s plant uses many industrial engines in its operations. As engines get older, they require more servicing and are more likely to break down, with some becoming non-repairable. While older engines still have resale value, a failed one is practically worthless. So, he thinks it may be more economical to better plan their replacement. While considering this decision, he realized the concern is equally applicable to other equipments. Thus, he is determined to analyze the issue thoroughly so that he can re-use the solution template.
a) Construct a spreadsheet simulation model to evaluate the replacement interval for the industrial engines. From historical data, an engine in year 1 fails with 0.04 probability during the year, costs $3,300 to maintain, and has a resale value of $9,500. Similar data for other years are year 2, 0.06 probability, $4,400 and $8,000; year 3, 0.08 probability, $5,500 and $6,400; year 4, 0.18 probability, $9,900 and $4,400; year 5, 0.24 probability, $12,000 and $3,000; and year 6, 0.32 probability, $13,200 and $1,100 respectively.
b) Assume current engine purchase price is $28,000, all prices are expected to change over time with an inflation rate of 3%, and all values are discounted to present values at 12% per annum.
c) Over a planning horizon of 25 years and for each possible replacement interval, determine the expected replacement interval and net present value per year.
d) Compute the results for at least 250 replications. What is the optimal replacement interval for the industrial engine?