A Dynamic Replacement Economy Decision Model

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Abstract
A generalization of Wagner's dynamic programming model for the replacement economy decision problem is presented. The model, illustrated by numerical examples, classifies relevant cash flows into three components: capital transfers, operating disbursements, and operating revenues. Conceptually, this model could be extended easily to an arbitrary number of component cash flows. Multiple alternative challengers to a current defender are considered, and each component cash flow of each challenger can vary independently according to the time of acquisition; thus differential inflation and prospective technological changes could be dealt with easily. A PASCAL implementation of the model, included as an appendix, was used to identify prospectively optimal sequences of assets in three numerical examples.

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