2.5. Capital Recovery Calculation

Try these first

1. 1.

   Define Equivalent Annual Cost (EAC).

   Hint

   What does EAC facilitate in decision-making?

2. 2.

   What is a sunk cost?

   Hint

   Think about costs from past decisions.

3. 3.

   What is considered when estimating EAC?

   • Initial price
   • Salvage value
   • Operational costs
   • All of the above

   Hint

   Think about everything that affects total costs.

4. 4.

   Can sunk costs affect your future investment decisions?

   • True
   • False

   Hint

   Consider what influence past costs have on present decisions.

5. 5.

   You have an old loader purchased for $45,000 with a salvage value of$8,000. Operating costs begin at $3,500 per year, and increase by$500 annually. Compute the EAC for year 1 and year 2. Determine in which year the loader should ideally be replaced based on your findings.

   Hint

   Be sure you understand how operating costs are increasing over the years.