A novel optimal single machine replacement policy using a single as well as a two-stage decision making process is proposed based on the quality of items produced. In a stage of this policy, if the number of defective items in a sample of produced items is more than an upper threshold, the machine is replaced. However, the machine is not replaced if the number of defective items is less than a lower threshold. Nonetheless, when the number of defective item falls between the upper and the lower thresholds, the decision making process continues inspecting and possibly repairing the machine and the decision making process goes on to collect more samples. The primary objective of own work is to determine the optimal values of both the upper and the lower thresholds using a Markov process to minimize the total cost associated with a machine replacement policy.