Equipment replacement analysis with an uncertain finite horizon

Chin Tan and Joseph Hartman

IISE Transactions, 2010, vol. 42, issue 5, 342-353

Abstract: Equipment replacement strategies are highly dependent on the horizon of analysis. While the literature can generally be categorized according to infinite or finite-horizon solutions, this paper examines the case where the horizon will last at least Ts periods but may last as long as Tl periods, due to uncertainty in the length of production runs or the temporary provision of services. Stochastic dynamic programming formulations are presented and solutions that minimize either expected costs or maximum regret are explored. Furthermore, the critical time period where optimal decisions diverge for different horizon realizations is identified. As this time period may be substantially earlier than Ts, a lease option contract is designed that allows owners to lower the risk of high costs that may result from a given horizon realization, while opening a possible source of revenue for a leasor.

Date: 2010
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DOI: 10.1080/07408170903394363

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