The Optimal Machine Life and Depreciation: Evidence from Deppon, Hengli and Shanghai Electric

The key issue during operating management is to maximize the profit by setting an appropriate life cycle of a piece of equipment. Generally, the engineering staff feels strongly that paying for new equipment is justified, whereas the others are convinced that running the old unit is less costly. The work reported in this paper aims to develop a methodology for optimizing machine life and then apply it to real case studies. The first part briefly introduces the importance of determining depreciation and the optimal machine life. Meanwhile, it also describes the process of working out the optimal replacement period in an infinite cycle with the Equivalent Annual Annuity model. In the following main bodies, quantitative and qualitative analyses are carried out in the three typical companies: Deppon Express Company, Hengli Petrochemical Company, and Shanghai Electric Group Co Ltd. The analysis is implemented based on the companies’ background, operating process, and financial situation, focusing on depreciation and optimal machine life. All the datum come from the annual financial report. The conclusion is that Deppon Express set up a successful example while high storage costs made Hengli Petrochemical Company does not perform well. Furthermore, Shanghai Electric Group Co Ltd still needs some improvements. These results pave a path for company decisions on machine replacing.