Technical Change and the Optimal Life of Assets

Abstract

In this paper the effects of technical change on the optimal lives of assets are explored. The generality of the dynamic programming approach to the problem of optimal asset life determination is contrasted with the traditional and highly restrictive "equal life" solution. Some of the possible effects of different forms of technical change on costs are examined and numerical examples of these are solved by dynamic programming to illustrate the consequences for the optimal lives of assets. We hypothesize that the likely effect of technical progress is a lengthening of the optimal replacement cycle.