Selection of a Farm Machinery Replacement Criterion Using Simulation

Extract

Little research has focused on developing a model which farmers can use to make yearly machinery replacement decisions. This paper contains an optimizing replacement criterion and then demonstrates the results of alternative rules of thumb used to implement the criterion in a real world situation.

The economic life of a machine is here defined as the interval of time during which that machine reaches its minimum average yearly cost. If a machine is replaced by an exact duplicate with the same annual costs, replacement occurs when the currently owned machine attains its economic life. When average cost reaches its minimum, marginal cost and average cost are equal. This is the same as saying that when economic life is reached, the actual yearly cost (marginal cost) is equal to the average yearly cost of the machine. Theoretically, replacement should occur when marginal cost first crosses average cost from below.