Ensuring consistency between strategic plans and equipment replacement decisions. Issue 3 (1st September 2020)

• Record Type: Journal Article
• Authors: Diniz, Carlos; Sessions, John
• Is Part Of: International journal of forest engineering. Volume 31:Issue 3(2020)
• Page Start: 211
• Page End: 223
• Publication Date: 2020-09-01
• Subjects: Economic life -- technological change -- dynamic programming -- replacement -- approximate infinite horizon; Forestry engineering -- Periodicals; Génie forestier -- Périodiques; Forestry engineering; Periodicals; 634.905
• DOI: 10.1080/14942119.2020.1768769
• Languages: English
• ISSNs: 1913-2220

Abstract

ABSTRACT: Strategic business plans are based upon assumptions of future wood costs. Future wood costs are affected by future equipment cost inputs and technological change. Equipment replacement decisions react to future cost inputs and technological change, taking advantage of opportunities to reduce future wood costs. By explicitly defining future equipment cost inputs and technological change, and their effect on equipment replacement decisions, future wood costs used in strategic planning have a rational and consistent basis. To ensure consistency between strategic plans and equipment replacement decisions we developed a forward reaching dynamic programming algorithm that recognizes the special structure of the equipment replacement problem. The output is an equipment replacement schedule that can be used to project equipment investment needs, operational costs, and tree harvesting costs. The results show that when we compare the proposed algorithm with the classic infinite series machine replacement approach under constant costs, both of them presented an optimal life with 52 months and a discounted cost of 5.691 USD million. Considering a 1200 month planning horizon under technological changes, the economic life policy proved optimum with 80 months of use for the first machine, while the next generations varied between 69 and 71 months of use with a discounted cost value of 4.617 USD million. Under the estimates of future costs and technological improvements, production costs decline and production rises. The algorithm is intuitive, flexible, easy to calculate, and yields the exact solution. No restrictions are needed on cost inputs over time, technologies, or discount rates.