ABSTRACT
Replacing equipment is often motivated by technological change: improvements in the equipment available for purchase. The modeling of technological change can take on many forms, including (1) increased capability and/or operability of the new asset, which is often captured through increased revenue generation; (2) decreased operating and maintenance expenses of the new asset when compared to the current equipment; and/or (3) better retention of salvage values over time for the new asset when compared to current equipment. These improved conditions are often accompanied by higher purchase costs. We review these different assumptions for technological change and their impact on equipment replacement decisions. Furthermore, we offer a viable alternative to modeling technological change with individual cash flow components through the use of equivalent annual costs. A numerical simulation is performed to illustrate the approach and examine the dynamics of optimal equipment lifetime under technological change.
