A model for equipment replacement due to technological obsolescence *

We consider the problem of deciding whether to keep a piece of equipment or to replace it with a more advanced technology. This decision must take into account both the nature of the available replacement technology and the possibility of future technological advances. Existing models are restrictive in the way they model the appearance of future technologies and the costs and revenues associated with those technologies. In an earlier paper we allowed the probability of appearance of new technologies to be non-stationary in time but required the costs and revenues of technologies to be different but constant over time. In this paper, we allow the technology forecasts and revenue functions associated with technologies to be non-stationary in time and consider salvage values for technologies. We develop a simple and efficient algorithm for finding the optimal decision using a forecast horizon approach. This approach finds the optimal decision in any period with minimal reliance on forecast data.