1.1. Equipment Life and Replacement Analysis (Part 3)

Try these first

1. 1.

   What does EAC stand for?

   Hint

   Think about how we relate costs annually.

2. 2.

   Why are sunk costs irrelevant in replacement analysis?

   Hint

   Consider what past costs mean for the future.

3. 3.

   What is the Equivalent Annual Cost (EAC)?

   • A method for cost escalation
   • An annualized cost figure reflecting total ownership costs
   • A measure of salvage value

   Hint

   Reflect on how this aids in making informed decisions.

4. 4.

   True or False: Sunk costs should be considered in replacement analysis.

   • True
   • False

   Hint

   Remember the definition of sunk costs.

5. 5.

   You have a piece of machinery that costs $80,000 with the following operating costs:$15,000 in year one, increasing by $2,000 each subsequent year. If the salvage value is projected to be$20,000 after five years and your discount rate is 10%, how would you calculate the EAC to determine optimal replacement timing?

   Hint

   Use a financial calculator for accurate present value computations.

6. 6.

   Consider a scenario where a defender shows consistent maintenance costs but a challenger, though more expensive upfront, has lower ongoing costs. Analyze the financial implications of maintaining the defender versus investing in the challenger.

   Hint

   Run a break-even analysis to find the crossover point in costs.