Applications of capital replacement models with finite planning horizons

Abstract

Capital replacement models with finite planning horizons can be used to model replacement policies in complex operational contexts. They may also be used to investigate the cost consequences of technological change. This paper reviews the application of these models in various such contexts. We also compare fixed planning horizon models with variable planning horizon models. As technological change, and hence the requirement of users and customers, often drives replacement decisions rather than cost optimality, the modelling focuses not only on obtaining optimal policies, but also on determining the increased cost of sub-optimal policies. The role of penalty cost formulations is also discussed. These ideas are illustrated using a number of case histories from medicine and transport.