Journal of Applied Mathematics and Decision Sciences
Volume 2 (1998), Issue 1, Pages 3-21
Optimal investment strategies for renewable facilities
Australian Housing and Urban Research Institute, Level 7, 20 Queen St Melbourne 3000, Australia
Copyright © 1998 Joe Flood. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Although a large literature exists on the repair and deterioration of machines, the
associated problem of maintenance schedules for deteriorating renewable facilities has been little
studied. These facilities include all those which can be restored to a near-new state by renovation
or rebuilding, so that the market value and performance of the facility depends on the current
state of repair rather than on the time since initial construction. This paper solves the general
deterministic problem of finding the optimal repair strategy for a depreciating renewable facility.
It is shown that the value of the facility should approach the level where a function defined as
the "nett internal return" is greatest. If the facility has a finite life before sale or demolition, an
adjustment to repair strategies should be made as the facility approaches this time, increasing
repairs where this permits a better sale price to be obtained, or discontinuing repairs if they are
not justified by scrap or market value. Solutions for a range of common depreciation functions
and for linear and quadratic repair cost functions are obtained. The optimal life of the facility
is determined at the time when nett "external" marginal return, which includes potential capital
gain or loss and opportunity cost of capital, falls to zero.