Practice Current Value And Sunk Cost Analysis (4.2) - Equivalent Annual Cost Calculation

Practice: Current Value and Sunk Cost Analysis

Lesson 4.2Equivalent Annual Cost Calculation

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9 questions

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6 sample questions

Question 1.
Define Equivalent Annual Cost (EAC).
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Think about how costs can be distributed across years.
Question 2.
What is a sunk cost?
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Consider costs that have already been spent on prior decisions.
3Question 3.
What does EAC stand for?
- Effective Annual Cost
- Equivalent Annual Cost
- Estimated Annual Cost
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It relates to how costs can be annualized.
4Question 4.
True or False: Sunk costs should be included when making a decision about a future investment.
- True
- False
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Remember what happens when money is spent.
Question 5.
A firm is choosing between two different systems, System A with an upfront cost of $200,000 for a lifetime of 15 years, and System B costing $180,000 lasting 12 years. Account for salvage values of $20,000 for both. Which has the lower EAC at a discount rate of 5%? Show detailed calculations.
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Focus on how future costs are transformed into annual costs!
Question 6.
A manufacturer invested $1 million into machinery, with operating costs projected to be $150,000/year. After 7 years, they can sell the machinery for $100,000. If the EAC is higher than anticipated, discuss potential business strategies to mitigate losses.
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Look towards future opportunities rather than past investments to make cost-effective decisions.

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