Given: P = Rs. 1,50,000, let maintenance cost be Ci during the year and depreciation be (P – Sn), where. Sn be the resale/ scrap value.
Here, Average annual cost A(n) is minimum for n = 6.
∴ The optimal replacement age is n = 6 year,
i.e., the tractor should be replaced after using it for 6 years.
The optimum Average annual cost is Rs. 18583.33.