2.1 - Replacement Justification Based on Economic Life
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Practice Questions
Test your understanding with targeted questions
What is depreciation?
💡 Hint: Think about how assets lose value as they are used.
How do you calculate annual cost?
💡 Hint: Remember, total cost includes all expenses for the year.
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Interactive Quizzes
Quick quizzes to reinforce your learning
What is the primary purpose of calculating depreciation?
💡 Hint: Consider the function of depreciation in financial terms.
True or False: The book value decreases annually.
💡 Hint: Think about how wear affects market value.
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Challenge Problems
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A company uses a loader that costs 2.5 million rupees initially. After 7 years, its annual operating cost rises to 1 million rupees with a depreciation at 30%. Calculate its current book value and whether it should be replaced.
💡 Hint: Remember to figure the cumulative operating cost before making a decision.
If you find that replacing an old machine increases productivity significantly, yet the new machine's costs are higher annually than the cumulative cost of the old, how does your decision change?
💡 Hint: Consider long-term gain versus short-term savings.
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Reference links
Supplementary resources to enhance your learning experience.
- Understanding Depreciation: What It Is and How to Calculate It
- How to Calculate Book Value: Definition and Formula
- Understanding the Importance of Operating Costs
- Replacement vs. Repair: Making Better Decisions for Equipment
- How to Calculate Cumulative Cost
- What Is Economic Life?
- Maximizing Equipment Profit: Methods and Strategies
- Deciding When to Replace Equipment — A Guide