Equipment Replacement Under Uncertainty

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 vehi...