Practice Equipment Life And Replacement Analysis (part 3) (1.1) - Equipment Life and Replacement Analysis (Part 3)

Practice: Equipment Life and Replacement Analysis (Part 3)

Lesson 1.1Equipment Life and Replacement Analysis (Part 3)

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11 questions

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6 sample questions

Question 1.
What does EAC stand for?
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Think about how we relate costs annually.
Question 2.
Why are sunk costs irrelevant in replacement analysis?
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Consider what past costs mean for the future.
3Question 3.
What is the Equivalent Annual Cost (EAC)?
- A method for cost escalation
- An annualized cost figure reflecting total ownership costs
- A measure of salvage value
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Reflect on how this aids in making informed decisions.
4Question 4.
True or False: Sunk costs should be considered in replacement analysis.
- True
- False
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Remember the definition of sunk costs.
Question 5.
You have a piece of machinery that costs $80,000 with the following operating costs: $15,000 in year one, increasing by $2,000 each subsequent year. If the salvage value is projected to be $20,000 after five years and your discount rate is 10%, how would you calculate the EAC to determine optimal replacement timing?
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Use a financial calculator for accurate present value computations.
Question 6.
Consider a scenario where a defender shows consistent maintenance costs but a challenger, though more expensive upfront, has lower ongoing costs. Analyze the financial implications of maintaining the defender versus investing in the challenger.
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Run a break-even analysis to find the crossover point in costs.

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