Capital Equipment Replacement Under Technological Change

Abstract

In this article, one of the commonly used replacement decision methods, the challenger–defender (CD) method, is modified. The proposed method is shown to outperform the original CD method and, in some cases, it outperforms the original economic life (EL) method. When the annual multiplier for the purchase price (a) is higher than that for the new asset operating and maintenance (O&M) costs (q), the solution of the modified CD method is more advantageous compared with the EL method when the new asset O&M costs purchased at time 0 (A) are higher. Furthermore, this modified CD method is more advantageous compared to the two-replacement-cycle method when the annual effective discount rate (d) is higher.