Replacement with Differing Asset

Replacing one asset with another of a different model adjusts the overall replacement timing depending on the life cycle of the new asset.

The graph below on the left illustrates an in-kind replacement at the optimal age of 60 based on the increasing marginal cost of the existing asset shown in red and the minimum life cycle cost of the new asset of the same type shown as the dashed line.

The graph on the right depicts the same existing asset and therefore has the same increasing marginal cost curve shown as a red line. The minimum life cycle cost of the new asset is lower, however, perhaps because the new asset will have a lower failure probability, decreased maintenance costs, or lower capital cost. As a result, the optimal replacement timing is eight years earlier than in the first example due to the benefits of the new asset. This should make intuitive sense: as the benefits of replacement increase (or the costs decrease) your incentive to replace is higher, so you'll do it sooner.

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