Sarthaks Test
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A tractor owner finds from the past records that maintenance cost and depreciation cost per year of the tractor whose purchase price is Rs. 1,50,000 are as follows:

Determine at which time is it possible to replace the tractor.

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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.

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