Given: P = Rs. 1,50,000, let maintenance cost be C_{i} during the year and depreciation be (P – S_{n}), where. S_{n} 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.