1.9. Economic Life and Equivalent Annual Cost

Try these first

1. 1.

   What does EAC stand for?

   Hint

   Think about breaking down total costs into annual terms.

2. 2.

   Why is market value more important than initial cost?

   Hint

   Consider what a buyer cares about.

3. 3.

   What does EAC help determine in equipment management?

   • The total purchase price of a machine
   • The optimal replacement time for equipment
   • The depreciation rate of machinery

   Hint

   Think about the cost over time.

4. 4.

   True or False: Sunk costs should influence future replacement decisions.

   • True
   • False

   Hint

   Consider if past expenditures matter.

5. 5.

   A machine has an initial cost of 40,00,000 with an expected life of 6 years. The operating costs are projected to increase from 3,00,000 in year 1 to 5,00,000 in year 6. Calculate the EAC and determine if it should be replaced.

   Hint

   Focus on calculating EAC year by year.

6. 6.

   Discuss the effect of failing to account for market value when analyzing equipment replacement.

   Hint

   Consider how historical costs differ from current realities.