3.2. Estimating Equivalent Annual Costs for Years

Try these first

1. 1.

   What does EAC stand for?

   Hint

   Think about how you measure costs annually.

2. 2.

   Define sunk cost.

   Hint

   Consider costs that are no longer relevant to decision making.

3. 3.

   Why is the timing of cash flows important in equipment replacement analysis?

   • It makes cash inflows larger
   • It allows for better estimation of future costs
   • It has no effect at all

   Hint

   Recall how future costs are discounted to present value.

4. 4.

   True or False: Sunk costs should be considered in replacement decision-making.

   • True
   • False

   Hint

   Think about costs that are no longer recoverable.

5. 5.

   If a factory decides to retain an aging machine instead of replacing it, calculate the implications based on an expected increase in annual operating costs by 10% each year.

   Hint

   Utilize the cash flow approach and take market value into account.

6. 6.

   A company owns a piece of machinery with a current market value of $25,000, a purchase cost of$100,000 with annual operating costs expected to double in the next five years. Discuss the appropriate replacement strategy.

   Hint

   Focus on analyzing potential future costs to inform the decision.