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Equipment Replacement Under Uncertainty

Author

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  • Robert A. Meyer, Jr.

    (Purdue University)

Abstract

This paper will present a model of equipment replacement in a stochastic environment utilizing a number of the component characteristics of an operations research orientation while being designed to emphasize the role of a stochastic representation of technological change and/or maintenance costs and the implications these have for the decision about replacement of equipment. The "replacement" referred to here is replacement of a machine in its entirety rather than the usual periodic-review-replacement-of-individual-pieces analysis to which the term "replacement" frequently refers in operations research literature. The paper outlines the approaches to equipment replacement in the literature of economics and the well-known Terborgh model and then introduces a stochastic model for studying certain aspects of equipment replacement together with the form of its analytic solution. A comparison of the cost implications of the Terborgh and stochastic model is presented for a specific example utilizing motor vehicle data. In addition, a general analytic comparison of the two replacement rules is provided.

Suggested Citation

  • Robert A. Meyer, Jr., 1971. "Equipment Replacement Under Uncertainty," Management Science, INFORMS, vol. 17(11), pages 750-758, July.
    • Handle: RePEc:inm:ormnsc:v:17:y:1971:i:11:p:750-758
    DOI: 10.1287/mnsc.17.11.750
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    Cited by:

    1. Fine, Charles H., 1989. "Developments in manufacturing technology and economic evaluation models," Working papers 3012-89., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Su, Chao-Ton & Wu, Sung-Chi & Chang, Cheng-Chang, 2000. "Multiaction maintenance subject to action-dependent risk and stochastic failure," European Journal of Operational Research, Elsevier, vol. 125(1), pages 133-148, August.

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