Question

The cost of a machine is Rs. 12000. The maintenance cost and resale value per year of the machine is given below.

When should the machine be replace

Answer 1

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.