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A machine costs Rs. 36,000. Its resale value and maintenance cost at different years are given below:

Resale Value (Rs.) 28,000 22,000 20,000 18,000 17,000 15,000 Find out when the machine should be replaced.

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Given : cost/purchase price ‘P’ = Rs. 36,000 

Let Ci be the maintenance cost, Sn be the resale value and n be the number of years.

Average annual cost : A(n) =\(\frac{T}{n}\) ; where T = (p – Sn ) + ΣCi

Here, average annual cost A (n) is minimum for n = 5. 

∴ The optimal replacement age is 5 years 

i.e. the machine should be replaced for every 5 years.

 Minimum annual average cost is Rs. 5,960.

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