Optimal replacement decisions applicable for capital equipments based on macroeconomic studies

Abstract

The thrust on the need for effective decision making in production and service sectors paved the way to develop several mathematical models in the face of reasonable degree of certainty. However, in reality there are several kinds of decisions to be made by taking into account the great uncertainty about one or more future events. As a remedy, stochastic models are tailored to represent, to an extent, the complexity of the real situations and the uncertainty prevailing around these situations. It is a well-known fact that it is difficult to develop a model that represents the reality as close as possible and simple for analysis. Consequently, different models each representing one or more parameters associated with real life situations are developed. The present study is a contribution towards the development of discrete-time stochastic model (using Markov chain) with finite state space that helps in evaluating optimal replacement decisions for a block of items under the influence of macroeconomic variables and determining an age at which the replacement is economical. Conventional models are available to determine the replacement age for different kind of items that deteriorate with time and that do not deteriorate but suddenly fail. For the items like machines, vehicles, machine tools, equipment etc. that deteriorate with time, models are available that consider the maintenance cost, resale value, depreciation cost etc. For the items like electric bulbs, tubes, tyres etc. that fail suddenly on usage, group replacement model is applicable. newlineHowever, there are certain type of items viz. Air Conditioners in a software industry, a block of LCD televisions in hotel industry, a block of pressure gauges in filling plants, a block of cutting tools in a work shop etc. that may not fail completely newlinexviii newlineon usage. They fail partially and can be brought back to the functional state by doing some repairs. They consist of many intermediate repairable states between functional and complete failure states that are more realisti