Best replacement policy using Equipment replacement problem.
Equipment Replacement Problem
A production department needs to purchase a new machine. As the machine ages, it requires additional maintenance and also has a higher defect rate. The production department plans to replace the machine every few years. The purchase price of a new machine is $12,000. The maintenance cost and cost of defective product is given below. A used machine has no resale value.
|
Age of machine
|
Maintenance
Cost ($)
|
Cost of
Defects ($)
|
|
First Year
|
3,000
|
2,000
|
|
Second Year
|
4,000
|
4,000
|
|
Third Year
|
6,000
|
7,000
|
|
Fourth Year
|
10,000
|
11,000
|
|
Fifth Year
|
20,000
|
24,000
|
Question: What is the best replacement policy over the next five years?