Replacement and the rental value of capital equipment subject to obsolescence

Abstract For a vintage model of capital equipment expressions for the implicit rental value and the optimal replacement policy are derived from the hypothesis of profit maximization. These will give unique solutions independent of product market conditions provided that two particular sequences converge to the same limit. The replacement rules of Terborgh, Smith, and Brems are shown to be special cases of this general model and also to depend on the particular convergence property of the sequences. The relationship of certain payoff period criteria to the optimal policy is also discussed.