Here, purchase price ; P = Rs. 12000

Let Ci be the maintenance cost during the year and Sn be the resale value. Then, Average annual cost is A(n) =\(\frac{T}{n}\) ,

Where T = (P – S_{n}) + ΣC ; and n = no. of years.

Here, Average annual cost A(n) is minimum for n = 3.

∴ The optimal replacement age is 3 years,

i. e., The machine should be replaced for every 3 years.

Minimum annual average cost is Rs. 3600.