It is important in a replacement study to compare the best challenger with the defender. Best (economic) challenger is described as the one with the lowest annual worth (AW) of costs for some period of years. If the expected remaining life of the defender and the estimated life of the challenger are specified, the AW values over these years are determined and the replacement study proceeds. However, if reasonable estimates of the expected market value (MV) and AOC for each year of ownership can be made, these year-by-year (marginal) costs help determine the best challenger. The economic service life (ESL) analysis is designed to determine the best challenger’s years of service and the resulting lowest total AW of costs. The resulting nC and AWC values are used in the replacement study procedure. The same analysis can be performed for the ESL of the defender. Replacement studies in which no study period (planning horizon) is specified
utilize the annual worth method of comparing two unequal-life alternatives. The better AW value determines how long the defender is retained before replacement. When a study period is specified for the replacement study, it is vital that market value and cost estimates for the defender be as accurate as possible. When the defender’s remaining life is shorter than the study period, it is critical that the cost for continuing service be estimated carefully. All the viable options for using the defender and challenger are enumerated, and their AW equivalent cash flows are determined. For each option, the PW or AW value is used to select the best option. This option determines how long the defender is retained before replacement. | 
2002 McGraw-Hill Higher Education