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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