After-tax equipment replacement analysis with technology change

Abstract

This thesis contends that equipment replacement analysis should consider the implications of technological change since a like for like replacement is unrealistic with the current state of technological change. The major effects of improvements are a decrease in salvage value and opportunity expense of not implementing the latest innovations. The improvements appear as gradual changes and as major breakthroughs.

Technological forecasting may be accomplished by several different methods including the Delphi method, analogy, and trend interpolation. A discussion of these methods and sources of information are given. The replacement model uses a future worth analysis, continuous discounting, discrete cash flows, a range of planning horizons, and incorporation of tax effects.

The model was implemented using a BASIC program with graphics capability. The inputs are current year, initial cost of the equipment, the first years operating cost, regular tax rate, capital gains tax rate, depreciable life (as defined by the ERTA), rates of gradual change, number, dates and effect of major breakthroughs.

A discussion of the sensitivity of the model to the various inputs is also given.