When should you replace an asset?
Every vehicle, generator, ambulance, CNC machine, X-ray unit or server reaches a point where keeping it costs more than replacing it. Maintenance bills climb every year while the resale value keeps falling. Replace too early and you waste capital; replace too late and you bleed on repairs and downtime. This calculator finds the sweet spot using the Equivalent Annual Cost (EAC) method taught in CA Final, CMA and MBA financial-management courses.
Method
- For each possible holding period n (1, 2, 3 … years), project the maintenance cost of every year and the resale value at the end of year n.
- Discount all cash flows to today at your cost of capital: PV of net cost = Purchase price + Σ PV(maintenance) − PV(resale).
- Convert that PV into an equal annual amount: EAC = PV ÷ Annuity factor(n, r).
- The holding period with the lowest EAC is the optimal replacement cycle.
Worked example
A hospital buys an ambulance for ₹12,00,000. Running and maintenance cost is ₹60,000 in year 1, rising 20% a year. Resale is 75% of cost after year 1 and falls 20% a year thereafter. Cost of capital 10%. The EAC comes to about ₹3.9 lakh if replaced every year, falls to a minimum of roughly ₹3.2 lakh around year 5–6, and climbs again as repair bills overtake the savings from delayed purchase. Replacing on a 5–6 year cycle is therefore the cheapest policy; keeping it 10 years costs noticeably more per year.
Inputs explained
- Maintenance rises by % — typical: cars 15–25%, heavy machinery 10–20%, IT hardware 25–40%
- Resale value — first-year drop is steepest (20–30% for vehicles), then 15–20% a year
- Discount rate — your borrowing rate or expected return on capital, usually 9–14% for Indian SMEs
- Downtime cost — lost revenue when the asset is under repair; important for ambulances, delivery vehicles and production machines
Why not just compare average cost per year?
Simple averaging ignores the time value of money — a rupee of repair in year 8 is cheaper than a rupee of purchase price today. The chart shows both the EAC and the simple average so you can see the difference. For decisions involving lakhs, the discounted EAC is the correct basis.
Beyond the numbers
Also consider technology obsolescence, safety and emission norms (BS-VI, 15-year commercial vehicle scrappage policy), warranty expiry, and income-tax depreciation benefits on the new asset. Use this result as the financial anchor for that discussion.
Frequently Asked Questions
What is Equivalent Annual Cost?
EAC converts the total discounted cost of owning an asset for n years into an equal yearly amount, making different holding periods directly comparable.
Which discount rate should I use?
Your weighted cost of funds — the interest rate on your term loan or CC if borrowed, or the return you could earn elsewhere if self-funded. 10–12% is typical for Indian SMEs.
Does the tool consider depreciation tax benefits?
No, it compares pre-tax cash costs. Tax depreciation favours newer assets slightly, so if the EAC curve is flat, lean toward the shorter cycle.
Can I use this for a car I own personally?
Yes. Enter service and insurance costs as maintenance and the expected second-hand price as resale. The optimal year tells you when running costs start outweighing the saving from not buying new.
Disclaimer: This tool is for general information and estimation only. Tax rates and rules change — verify with official sources or a professional before acting. Read full disclaimer.