An auto repair shop always needs to have an engine analyzer available. A new engine an lyzer costs $1,000. The cost mi of maintaining an engine analyzer during its ith year of operation is as follows: m1 = $60, m2 = $80, m3 = $120. An analyzer may be kept for

1, 2, or 3 years; after i years of use (i 1, 2, 3), it may be traded in for a new one. If an i-year-old engine analyzer is traded in, a salvage value si is obtained, where s1 $800, s2 $600, and s3 $500. Given that a new machine must be purchased now (time 0;
see Figure 8), the shop wants to determine a replacement and trade-in policy that minimizes net costs (maintenance costs) (replacement costs) – (salvage value received)
during the next 5 years.

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FIGURE 8 Year 1 Year 2 Year 3 Year 4 Year 5 Time Horizon for Equipment Time Time Time Time Time Time 0 1 2 3 4 5 Replacement