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A small manufacturer uses an industrial boiler in its production process. A new boiler can be purchased for $10,000. As the boiler gets older, its maintenance expenses increase while its resale value declines. Since the boiler will be exposed to heavy use, the probability of a breakdown increases every year.
Assume that when a boiler breaks down, it can be used through the end of the year, after which it must be replaced with a new one. Also, assume that a broken-down boiler ahs no resale value.
Some of the basic data are given in the following table:
Year of operation Expenses Resale Value Breakdown ...
Optimal Replacement Strategy is considered.