Optimal investment strategies for renewable facilities (Q1130149)

Summary: 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 ``net 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 net ``external'' marginal return, which includes potential capital gain or loss and opportunity cost of capital, falls to zero.