Equipment replacement and inflation

Mass production has been found to be an economical instrument for satisfying human wants. This process requires a complex industrial organization together with a large investment in producer goods. These producer goods are employed to alter the physical environment and create consumer goods. As a result, they are consumed or become obsolete, inadequate, or otherwise, and therefore, must be replaced. Replacement models fall into two categories, depending upon the life pattern of the equipment under study. The first deals with models for replacing equipment that deteriorates with time. The choice between an equipment and its potential replacement will be based on analysis directed to reduce the difference in future receipts and disbursements to an equivalent basis for comparison. The second consider models that may be used to establish replacement policy for equipment that does not deteriorate appreciably with time, but falls instantaneously and completely. Replacement models for items that fails require the use of probabilistic concepts. Inflation and increased productivity are economic realities that have been a part of the decision environment down through history. Although both may have a profound effect upon the procurement and use of producer goods, they are usually disregarded in replacement models because of their unpredictability. Inflation tends to occur in surges and is not felt uniformly throughout the economy. Increased productivity is likely to be even more unpredictable and may occur in discrete and rather significant increments. When it can be assumed that the rate of inflation and increased productivity are consistent rather than erratic over time, their effects can be made part of a decision model. This assumption is not likely to be realistic in an individual case, but its acceptance allows the overall effect of these two factors upon machine replacement to be illustrated.