Abstract
This paper provides an approach to equipment replacement decisions based on input-output analysis. Replacement decision is cast within the framework of production technology selection by examining the input-output requirements for the production system. The proposed approach explicitly integrates production and investment possibilities into equipment replacement decisions. Specifically, a replacement model is developed which incorporates factors such as input substitution, expansion of output, product price-volume relationship, and obsolescence and deterioration effects. The optimal replacement policy is to maximize the terminal wealth of a machine tool over a specified planning horizon.
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