2. Calculating Equivalent Annual Cost

Try these first

1. 1.

   What does EAC stand for?

   Hint

   Think about its purpose in finance.

2. 2.

   Why should sunk costs be ignored in replacement analysis?

   Hint

   Consider what sunk costs mean in the financial context.

3. 3.

   What does EAC represent in financial analysis?

   • Annual Capital Assessment
   • Equivalent Annual Cost
   • Economic Adjustment Cost

   Hint

   Focus on its core purpose in equipment management.

4. 4.

   True or False: Sunk costs are essential for making current financial decisions.

   • True
   • False

   Hint

   Think about what makes costs relevant for decision.

5. 5.

   A company considers replacing a machine purchased at $50,000, with expected annual operating costs of$4,000 in the first year, $5,000 in the second, and$6,000 in the third. Assume a capital recovery factor of 0.1. What is the EAC?

   Hint

   Break down your steps into costs by year for clarity.

6. 6.

   Two pieces of equipment have the same purchase price but different EACs due to maintenance. Machine A's EAC is $12,000 while Machine B's is$10,000. What advice would you give a manager trying to choose between them?

   Hint

   Think about long-term expenses versus upfront costs in decision-making.