Looking at my web stats, I’ve been seeing some new incoming links to my Repair or Replace Worksheet. On top of that, I added the numbers up and so far there have been 1,300+ downloads of this guide! Given all this activity, I thought it would be a good time to review the worksheet and give it a polish. I cleaned up the formatting and tightened up the language, and so I’m pleased to present this latest edition (v5) to you. I hope the framework I’ve created has helped people organize their thoughts and make better decisions in the face of this common dilemma.
Editing the worksheet for this latest release prompted some interesting thoughts about the nuances of the value-added repair calculation in section #5—including thinking about those situations where it’s probably useless! While all this is fresh in my mind, let’s walk through some scenarios:
Repair or Replace Equality
It’s curious to think about the point where repair and replace are equal. Let’s say you have a car that recently broke down, sparking the following conundrum: should I fix it or try to find another one? Following the instructions in a super helpful worksheet found on the magical Interwebs, you first determine the salvage value of your car. You talk to a few junkyards and dealers and think you could get $3,000 if you unloaded the car in its current broken state. Next, you do some research to determine the likely value of the car after it has been repaired. You look at car pricing guides, auction listings, and classified ads, determining it would fetch around $4,000. The value-added calculation for a repair is this:
machinepost-repair – machinesalvage = repairvalue-added
In our case, that would be:
$4,000 – $3,000 = $1,000
The repair path we’re considering is predicted to add $1,000 of market value to the car. The car is worth $3,000 in its broken state and you assert it would be valued at $4,000 after being fixed. The difference ($1,000) is the value being added to the car by a successful repair. Let’s say you’ve found a reputable mechanic willing to make the needed repairs for a fixed price of $1,000. The gain/loss equation is as follows:
repairvalue-added – repaircost = repairprofit/loss
Here, that is:
$1,000 – $1,000 = 0
A $1,000 repair that increases the value of the car by $1,000 is neutral, neither favoring repair nor replacement. To see why, let’s look at the replacement scenario: we’ve already determined that the fair market value of a working car (i.e., one that has already been repaired) like ours is $4,000. That means we could take our broken car, sell it for its salvage value ($3,000), then combine those proceeds with $1,000 from our own pocket to come up with the $4,000 needed to buy a similarly used car.
The discovery I made this time around was that the value added by a repair and replacement cost were both calculated by the same equation! That is:
machinepost-repair – machinesalvage = repairvalue-added = machinereplacement cost
For the owner of a broken machine, the cost of replacing it with a functional equivalent is the market value of a working one, minus the salvage proceeds. This is the same as the value added by a repair that restores the machine to working. Neat!
In this particular example, spending $1,000 would take us to the same place. If we choose repair, we’d spend $1,000 with a mechanic and end up with a car that was worth $4,000. If we choose replacement, we’d also spend $1,000 (combined with the $3,000 of salvage we’d get from selling the broken car) and likewise end up with a car that was worth $4,000. From this point of equilibrium, you can see that raising or lowering the cost of repair would tip the scale to either side.
Negative Salvage Value
On the other end of the spectrum, I want to show you the effect that a large negative salvage value has on the repair or replace dilemma. While a broken machine can often be sold for scrap or given away for free, that’s not always the case! If the machine contains toxic materials, or is particularly difficult to remove, then the salvage value may actually dip into minus territory.
Let’s say you are in charge of maintenance at a hospital and have to deal with a broken piece of medical equipment that takes X-rays. Unfortunately, this machine contains substances that are highly hazardous to human health, and therefore its safe disposal is costly and legally mandated. Negative salvage costs are easy to plug into the value-added equation:
machinepost-repair – machinesalvage = repairvalue-added
If this machine is worth $5,000 after being repaired, but would cost $10,000 to dispose of it, then the calculation looks like this:
$5,000 – -$10,000 = $15,000
Subtracting a negative is the same as adding a positive, so you can see that a negative salvage value makes repair much more valuable! Here, a successful fix would transform a significant liability into a positive asset: this large value-added swing sets the equality point between repair and replace at $15,000. It may seem counterintuitive to pursue a repair that would exceed the price of a new machine, but remember that the total replacement cost includes both acquiring the new and dispensing with the old: here, going down the path of replacement would require the outlay of $5,000 to buy an equivalent working machine, plus $10,000 to dispose of the broken one.
While positive salvage values help to defray the cost of replacement (i.e., you can sell a broken machine and put the money towards the purchase of a new one), negative salvage values add to your replacement costs.
“All models are wrong but some are useful”
How does all this actually play out in real life? This is probably a good time to point out what I try to make clear in the worksheet: the value-added calculation is just one factor, among many, that can steer the repair or replace decision. My sense is that its usefulness is highly dependent upon the quality of information used for the inputs to the equation. Can accurate information be obtained about repair costs, salvage values, and the prices of equivalent working replacements? If so, how expensive is it to gather this data?
I can think of situations where these variables would be easy to acquire, and others where searching for them will impose significant opportunity costs. If my Toyota Camry—whose production numbers exceed 10 million!—ever broke down, I’m reasonably confident I could come up with these figures. There are dozens of auto shops in my area that can provide repair estimates. For the salvage and replacement values, there are abundant sources of pricing information: in person, over the phone, or on-line, you can consult dealerships, junkyards, Kelly Blue Book, eBay auction results, Craigslist, etc. It doesn’t get any more mass-market than this, and the sheer volume of Camry owners interacting with the repair marketplace on a continuous basis leaves behind a rich trail of data.
On the other hand, there are bespoke systems of all kinds that will resist this kind of analysis. I’m the co-owner of a community workshop for motorcyclists in San Francisco and we’ve had several people use our space to build the custom bike of their dreams. However, when the dream has faded, I’ve also witnessed people trying to sell these one-off beauties. How do you price a Franken-cycle that is part Honda, Suzuki, and Ducati, assembled by hand? This situation is often confusing for both the buyer and seller, because it’s difficult to make comparisons to known price points.
What’s a machine worth? Of course, when selling anything, the rule is always that it’s worth “whatever someone else is willing to pay for it.” Unfortunately, discovering that optimal price might take significant time and effort. With exotic items, sellers usually deal with that “fumbling about in the dark” feeling. With damaged exotic items, it can get really murky (add in a swamp filled with molasses). Do you take the first offer that comes along or hold out for more? With mass-market goods, the collective experience of the market gives you a measuring stick to judge incoming offers (or the lack thereof). When it comes to selling one-of-a-kind things, the burden of price discovery falls upon you. Of course, there’s no doubt you could fill in these pricing information gaps with some w-o-r-k. However, sometimes it’s just not worth it to do the research needed to pierce this veil of ignorance: as always, economic considerations ultimately guide the troubleshooting process and determine what is feasible.
Luckily, if these quantitative methods are found lacking, the worksheet gives you a host of other factors to consider. These qualitative dimensions connect to the underlying purpose of a machine in the context of your business or life, which always precedes the use of any equation.
For more on the fascinating intersection between troubleshooting and economics, see my other articles on this topic: Repair Or Replace?, The 50 Percent Rule, and The Economics Of Troubleshooting.