Asset replacement under improving operating and capital costs: a practical approach

Abstract

We analyse the serial asset replacement problem under incomplete data about technological change that that affects the capital cost, operating cost and salvage value of newer assets. We construct an efficient discrete-time algorithm for this problem in the case where only partial information is available about future costs of new assets. The algorithm is based on introducing a corrected annual capital recovery factor into the classic Economic Life method. It produces the same lifetime of the first asset as the benchmark infinite-horizon cost minimisation when the operating cost, capital cost and salvage value of new assets decrease proportionally. The algorithm has the same complexity as the Economic Life method but performs much better under improving technology. Numeric simulation demonstrates a superior efficiency of the suggested algorithm vs. existing methods in practical situations when only few discrete measurements of technological change are available.

Keywords:

• asset replacement
• technological change
• economic life
• cost minimisation
• corrected capital recovery factor

Acknowledgements

The authors are thankful to three anonymous reviewers for valuable comments and to the Editor-in-chief Professor Alexandre Dolgui for highly professional and courteous handling of the manuscript.

Disclosure statement

No potential conflict of interest was reported by the authors.