Question

An engineering company has a machine whose purchase price is Rs. 80,000. The expected resale value and expected maintenance cost in different years are as given below :

Determine the optimal age of replacement of the machine.

Answer 1

Here p = Rs. 80,000. Let C_i and S_n be the maintenance cost and resale value.

Then total annual cost: T = (p – S_n) + ΣC_i

Annual average cost [A(n)] = T/n

Here, Annual average cost A(n) is minimum for n = 3 years. 

Therefore the optimal age of replacement of the machine is n = 3