Equipment Replacement Under Uncertainty

Robert A. Meyer, Jr.
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Robert A. Meyer, Jr.: Purdue University

Management Science, 1971, vol. 17, issue 11, 750-758

Abstract: This paper will present a model of equipment replacement in a stochastic environment utilizing a number of the component characteristics of an operations research orientation while being designed to emphasize the role of a stochastic representation of technological change and/or maintenance costs and the implications these have for the decision about replacement of equipment. The "replacement" referred to here is replacement of a machine in its entirety rather than the usual periodic-review-replacement-of-individual-pieces analysis to which the term "replacement" frequently refers in operations research literature. The paper outlines the approaches to equipment replacement in the literature of economics and the well-known Terborgh model and then introduces a stochastic model for studying certain aspects of equipment replacement together with the form of its analytic solution. A comparison of the cost implications of the Terborgh and stochastic model is presented for a specific example utilizing motor vehicle data. In addition, a general analytic comparison of the two replacement rules is provided.

Date: 1971
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:17:y:1971:i:11:p:750-758

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