Theoretical and Empirical Problems in Modeling Optimal Replacement of Farm Machines

Research on the optimal replacement problem has emphasized specification of the theoretically appropriate criterion. Today, the most commonly applied replacement decision theory for machinery assumes that the owner will replace each older machine, “defender,” with an identical new machine, “challenger,” in accordance with long-run cost minimizing or profit maximizing criteria (i.e., wealth maximization). Perrin (p. 60) summarizes the cost minimization criterion which should be applied: “A machine should be kept another period if the marginal costs of retaining it … are less than the ‘average’ periodic costs of a replacement machine.” As Chisholm noted, this criterion is “deceptively simple.” Support for Chisholm's observation is evidenced throughout the literature, because acceptance and use of an appropriate criterion has come about slowly.