3.1. Replacement Cost Estimates

Try these first

1. 1.

   What is economic life?

   Hint

   Think about the phrase 'minimum cost of holding'.

2. 2.

   What is one reason machines become obsolete?

   Hint

   Consider what happens when new machines are introduced.

3. 3.

   What is economic life?

   • The time period over which costs are minimized
   • The time period over which repairs are maximum
   • The time period before machine failure

   Hint

   Think 'minimized costs' when referring to economic life.

4. 4.

   True or False: Obsolescence affects a machine's salvage value.

   • True
   • False

   Hint

   Obsolescence and value are interconnected.

5. 5.

   Calculate the total replacement cost after four years for a machine starting at 35,00,000 with 2,10,000 annual increases. Also, factor in a depreciation of 1,00,000 per year after its third year.

   Hint

   Sum all increases and account for depreciation appropriately.

6. 6.

   If a machine has a downtime cost of 500 per hour and it is down for 30 hours due to repairs, calculate the total downtime loss.

   Hint

   Multiply the hourly cost by the total hour lost.