Algorithm (Procedure)

Thus the procedure for obtaining the decision when to replace the equipment in the case of money value not changing with time can be outlined as follows :

• Step 1

Draw the table with columns as shown below and enter the values of columns 1, 2, 3 and 4 as given in the problem.

• Step 2

Calculate net value by difference of cost and salvage value (C - S), i.e. second column value - third column value and enter in Column 5

• Step 3

Calculate cumulative running cost, i.e. Σ R_n cumulating of Column 4 and enter in Column 6.

• Step 4

Calculate total cost TC = (C - S) + Σ R_n, i.e. sum of 5^th column value and 6^th column value to enter in Column 7.

• Step 5

Calculate average total cost for n years, i.e. divide 7th column value by 1^st column value, i.e. ATC = 1/n [(C - S) + Σ R_n] and enter in Column 8.

• Step 6

Observe the values in column 8 and identify the minimum value. The year corresponding to the minimum value is the age of the equipment to be replaced.