A Method for Evaluating Information for the Equipment Replacement Decision: An Application of Monte Carlo Simulation

Abstract

"Nearly every business manager must give careful consideration to the important and recurring problem of equipment investment and/or replacement. Frequently accompanying any Investment/replacement decision are considerations of alternatives such as renting, leasing, and/or custom hiring the necessary equipment capacity. An empirical model was developed to evaluate the relative importance of specific types of information while simultaneously treating alternatives commonly considered in the agricultural equipment investment/ replacement decision process. The expected value of perfect information (EVPI) about three states of nature was measured In terms of the impact of prior uncertainty on a firm’s discounted net revenue over a fifteen year planning horizon. The difference between the discounted net revenue received under the condition of prior certainty and that received under the condition of prior uncertainty (given an optimal equipment investment/replacement policy is utilized in both situations) is defined as the EVPI about the state of nature. "