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5 cards from this section. Quick, good the night before a test.
What is the formula to calculate Equivalent Annual Cost?
Think about annualizing costs and using factors.
What are sunk costs?
Consider costs that can't influence future decisions.
What is the main purpose of calculating Equivalent Annual Cost?
Think about long-term financial assessments.
True or False: Sunk costs should be included in the replacement analysis.
Consider what costs can actually impact future decisions.
A company has two machines: Machine A costs ₹5,00,000, has an operating cost of ₹1,00,000 per year, and a salvage value of ₹2,00,000 after 3 years. Machine B costs ₹3,00,000, with an operating cost of ₹50,000 per year and a salvage value of ₹1,00,000 after 3 years. Calculate the EAC for both machines and advise which machine the company should choose.
Use respective capital recovery and sinking fund factors to find EAC.
An organization decides to replace its old equipment. The old equipment has a market value of ₹4,00,000, annual maintenance costs of ₹2,00,000, and is expected to last for another 5 years. The new equipment costs ₹6,00,000, has an annual maintenance cost of ₹1,50,000, and a salvage value of ₹3,00,000. What would be the EAC for both pieces of equipment, and which should they keep?
Remember to consider future salvage values while calculating EAC.
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