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Economic life replacement under improving technology

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  • Yatsenko, Yuri
  • Hritonenko, Natali

Abstract

The economic life (EL) method of asset replacement is analyzed under improving technology that impacts the maintenance cost, new asset cost, and salvage value. In particular, we prove that the asset EL is constant when all these costs decrease with the same rate. If these costs decrease geometrically, then the EL method with a corrected capital recovery factor calculates the optimal asset lifetime over the infinite horizon for arbitrary age-dependent deterioration and salvage value. In a general case, the EL method delivers an optimal replacement decision when the relative rate of technological change is less than 1%. For larger rates, we recommend to minimize the annual cost over two future replacement cycles, which was earlier proposed and implemented by Christer and Scarf, Journal of the Operational Research Society 45, 1994.

Suggested Citation

  • Yatsenko, Yuri & Hritonenko, Natali, 2011. "Economic life replacement under improving technology," International Journal of Production Economics, Elsevier, vol. 133(2), pages 596-602, October.
    • Handle: RePEc:eee:proeco:v:133:y:2011:i:2:p:596-602
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    References listed on IDEAS

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    1. Suresh Sethi & Suresh Chand, 1979. "Planning Horizon Procedures for Machine Replacement Models," Management Science, INFORMS, vol. 25(2), pages 140-151, February.
    2. James C. Bean & Jack R. Lohmann & Robert L. Smith, 1994. "Equipment replacement under technological change," Naval Research Logistics (NRL), John Wiley & Sons, vol. 41(1), pages 117-128, February.
    3. Yatsenko, Yuri & Hritonenko, Natali, 2008. "Properties of optimal service life under technological change," International Journal of Production Economics, Elsevier, vol. 114(1), pages 230-238, July.
    4. YATSENKO, Yuri & HRITONENKO, Natali, 2008. "Discrete-continuous analysis of optimal equipment replacement," LIDAM Discussion Papers CORE 2008069, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Goetz, Renan-Ulrich & Hritonenko, Natali & Yatsenko, Yuri, 2008. "The optimal economic lifetime of vintage capital in the presence of operating costs, technological progress, and learning," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 3032-3053, September.
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    1. Yatsenko, Yuri & Hritonenko, Natali, 2020. "Optimal asset replacement: Profit maximization under varying technology," International Journal of Production Economics, Elsevier, vol. 228(C).
    2. Stutzman, Sarah & Weiland, Brandon & Preckel, Paul & Wetzstein, Michael, 2017. "Optimal replacement policies for an uncertain rejuvenated asset," International Journal of Production Economics, Elsevier, vol. 185(C), pages 21-33.
    3. Yatsenko, Yuri & Hritonenko, Natali, 2015. "Algorithms for asset replacement under limited technological forecast," International Journal of Production Economics, Elsevier, vol. 160(C), pages 26-33.
    4. Yatsenko, Yuri & Hritonenko, Natali, 2017. "Machine replacement under evolving deterministic and stochastic costs," International Journal of Production Economics, Elsevier, vol. 193(C), pages 491-501.
    5. Yuri Yatsenko & Natali Hritonenko, 2016. "Asset replacement under improving operating and capital costs: a practical approach," International Journal of Production Research, Taylor & Francis Journals, vol. 54(10), pages 2922-2933, May.
    6. Adkins, Roger & Paxson, Dean, 2013. "Deterministic models for premature and postponed replacement," Omega, Elsevier, vol. 41(6), pages 1008-1019.
    7. Richardson, Steven & Kefford, Adrian & Hodkiewicz, Melinda, 2013. "Optimised asset replacement strategy in the presence of lead time uncertainty," International Journal of Production Economics, Elsevier, vol. 141(2), pages 659-667.
    8. Mellal, Mohamed Arezki, 2020. "Obsolescence – A review of the literature," Technology in Society, Elsevier, vol. 63(C).

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