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.