3.3. Loss Associated with Replacement

Try these first

1. 1.

   What does economic life refer to?

   Hint

   Think about the costs associated with keeping a machine.

2. 2.

   What is depreciation?

   Hint

   Consider how machinery loses value as it ages.

3. 3.

   What method can be used to calculate depreciation?

   • Straight-line method
   • Double declining balance
   • Unit cost method

   Hint

   Consider which method accelerates depreciation more.

4. 4.

   True or False: A machine’s economic life determines when it is necessary to replace it.

   • True
   • False

   Hint

   Think about the costs incurred when keeping an aging machine.

5. 5.

   An old truck costs $5,000 in maintenance yearly. If its replacement cost increases by 10% annually, how long should it be kept before replacement if it depreciates at a rate of 15% per year?

   Hint

   Calculate yearly costs and compare them over the years.

6. 6.

   If a replacement machine will save you $3,000 in efficiency each month but costs$12,000 to purchase, how many months until the replacement is cost-effective?

   Hint

   Consider the total savings versus total cost.