The ConnexFM2024 National Conference will provide practical solutions for the repair-versus-replace conundrum.
By Jason Henninger
Facilities managers often face difficult cost-analysis decisions regarding the properties they oversee. While some choices are no-brainers, others require a more in-depth and analytical approach.
Dr. Clair Nixon is a professor emeritus of accounting, focusing on tax policy at Texas A&M University. He retired from academia six years ago, but for the last 40 years, he’s worked as a lecturer and consultant for numerous corporations and organizations, including 20 years working with Halliburton Worldwide. He has run multiday workshops on capital budgeting, financial statement analysis and cost accounting issues.
Bringing his experience and expertise to the ConnexFM2024 National Conference in Nashville, Tennessee, this April, Dr. Nixon will host a workshop to explore a repair-versus-replace formula he’s been using and teaching for decades.
Digging into the Details
The methodology Dr. Nixon has created is a customizable way of calculating the net present value relative to the costs of replacing old equipment with new or simply getting it fixed—a subject of relevance to any facilities manager.
“We’re concerned with the time value of money,” he said. “Let’s take a forklift as an easy example. I can buy a new forklift today or look at what it would cost to continue to repair it. Are there any differences in efficiency gains? Labor material differences? Insurance costs on new-versus-used? Depreciation issues? Then we estimate that over a period of years — let’s say, seven years for a forklift — and find the present value that posts cash flows over that seven-year period. The tax benefit to current-year depreciation is also factored in. Then we compare the costs under a replacement approach versus a repair approach.”
Taxes are also calculated. In the U.S., there’s a 21% corporate tax rate, but in Dr. Nixon’s formulation, that can easily be swapped out with any country’s taxes.
“I’ve got a piece of equipment, and the replacement cost is $1 million. But the repair costs are $250,000 a year. If I buy the new one, it will last seven years. But if I keep the old one, and my repair costs are just going up, I want to find out what ultimately is the best approach from a time value of money,” Dr. Nixon said.
Situations like this, calculating myriad factors to determine repairing or replacing, have a direct impact on spending decisions based on the year’s capital budget. This formula allows FMs to identify the best options. “This is what we’ll walk through in the workshop,” Dr. Nixon said, “explaining the basic principles and then applying it to a problem.”
Accounting for Differences
One of the key features of Dr. Nixon’s approach is how easily it can be customized to fit numerous variables. After all, equipment age and reliability are not the only factors that may lead to a piece of equipment being replaced. For example, as regulations change for refrigerants, many FMs in grocery spaces find themselves wondering if, or when, entirely new machinery needs to be put into place or if there’s a benefit to updating or refitting older equipment to be compliant. Similarly, the costs and benefits of upgrading to newer technologies, such as AI-enhanced equipment, can also be calculated. The method taught in the workshop can be adjusted to find an answer considering such variables.
“If technology in the new equipment allows you savings, all you need to do is determine what they are, and you can plug that in,” Dr. Nixon said. “At the end of the day, it’s an Excel spreadsheet. There’s nothing magical. Whatever data you have that separates the purchase of a new piece of equipment from the repair of an old one can be factored in, whether it’s depreciation, repair savings on the new one, downtime issues or replacement units while repairing the old one.”
Dr. Nixon’s workshop will be interactive and hands-on, so make sure you bring your laptop and your curiosity. “Instead of me inputting all the numbers, I’ll guide the participants through it,” Dr. Nixon said. “But I want attendees to work together and come up with a solution. I’ll be asking them questions. I’ll be looking to see what they’re coming up with. Hopefully, by the time we’re done, I’ll have a team of participants work a problem and show the rest of the group what results they found.”