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Suppose a firm with a cost of capital of 8% per year needs equipment on an ongoing basis. The equipment costs $700,000 to buy at

  1. Suppose a firm with a cost of capital of 8% per year needs equipment on an ongoing basis. The equipment costs $700,000 to buy at t=0, and the operating and maintenance (O&M) costs at t=1,2,3,4 are $250,000, $300,000, $400,000, and $600,000 respectively. Work out how often the firm should replace one unit with another in order to minimize the total costs (sum of replacement and O&M costs).

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