Economic life replacement under improving technology

The economic life (EL) method of asset replacement is analyzed under improving technology that impacts the maintenance cost, new asset cost, and salvage value. In particular, we prove that the asset EL is constant when all these costs decrease with the same rate. If these costs decrease geometrically, then the EL method with a corrected capital recovery factor calculates the optimal asset lifetime over the infinite horizon for arbitrary age-dependent deterioration and salvage value. In a general case, the EL method delivers an optimal replacement decision when the relative rate of technological change is less than 1%. For larger rates, we recommend to minimize the annual cost over two future replacement cycles, which was earlier proposed and implemented by Christer and Scarf, Journal of the Operational Research Society 45, 1994.Asset replacement models Technological change Economic life method Present worth Infinite horizon optimization