Often project lives do not match the required analysis period and/or do not match each other. For example, two machines may perform exactly the same function, but one lasts longer than the other and both of them last longer than the analysis period for which they are being considered. We are then left with some unused portion of the equipment, which we include as salvage value in our analysis. Salvage value is the amount of money for which the equipment could be sold after its service or the dollar measure of its remaining usefulness.
When project lives are shorter than the required service period, we must consider how, at the end of the project lives, we will satisfy the rest of the required service period. Replacement projects — additional projects to be implemented when the initial project has reached the limits of its useful life — are needed in such a case. Sufficient replacement projects must be analyzed to match or exceed the required service period.
To simplify our analysis, we sometimes assume that the replacement project will be exactly the same as the initial project, with the same corresponding costs and benefits. However, this assumption is not necessary. For example, depending on our forecasting skills, we may decide that a different kind of technology — in the form of equipment, materials, or processes — is a preferable replacement. Whether we select exactly the same alternative or a new technology as the replacement project, we are ultimately likely to have some unused portion of the equipment to consider as salvage value at the end of the required service period. On the other hand, if a required service period is relatively short, we may decide to lease the necessary equipment or subcontract the remaining work for the duration of the analysis period. In this case, we can probably exactly match our analysis period and not worry about salvage values.
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What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.