THE REPLACEMENT CRITERION
The economic life of a machine is here defined as the interval of time during which that machine reaches its minimum average yearly cost. If a machine is replaced by an exact duplicate with the same annual costs, replacement occurs when the currently owned machine attains its economic life. When average cost reaches its minimum, marginal cost_ and average cost are equal. This is the same as saying that when economic life is reached, the actual yearly cost (marginal cost) is equal to the average yearly cost of the machine. Theoretically, replacement should occur when marginal cost first crosses average cost from below.