Sensitivity analysis of rent replacement models

Rent models are a useful class of replacement models which can be used to study the replacement of capital equipment over a long period of time. This paper attempts to quantify the sensitivity of rent models as applied to commercial vehicles using statistical simulation. A method based on Markov chain to simulate the interest rate and discount factor is presented. Changes in parameters such as capital cost, maintenance cost, resale value, current discount factor as well as tax parameters are made and their effects on the optimal replacement age of the trucks are analysed.