3. Replacement of Assets that
Deteriorate with Time
• If the scrap value of the equipment is zero
(depreciation cost is not given), replace the
equipment when the maintenance cost becomes
greater than the current average cost.
• If the resale value (depreciation cost) is given
along with the maintenance cost and the cost of
equipment, then the optimal replacement period
is determined by the minimum value of the
average cost to date.
4. Example:
The following table gives the running costs per
year and resale values of a certain equipment
whose purchase price is Rs. 65,000. At what year is
the replacement due optimally:
Year: 1 2 3 4 5 6 7 8
Running 14 15 17 20 24 28 33 39