2.1. Finding Present Worth of Costs

Try these first

1. 1.

   Define present worth.

   Hint

   Think about why future money is not worth as much as money today.

2. 2.

   What is a sunk cost?

   Hint

   Consider costs that are irrelevant for decision-making due to completion.

3. 3.

   What does present worth represent?

   • The future value of costs
   • The current value of future costs
   • The initial cost of investment

   Hint

   Remember, future amounts are often lower than their present parallels.

4. 4.

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

   Hint

   Think if previous expenses genuinely affect future financial decisions.

5. 5.

   A bulldozer costs $200,000, with annual operating costs increasing from$15,000 to $25,000 over its useful life of 5 years. If it can be sold for$30,000 after 5 years, calculate the total EAC assuming a discount rate of 8%.

   Hint

   Consider each year's operating increase while summing expenses for accurate valuation.

6. 6.

   Your equipment’s initial cost is $120,000, it has a predicted market value of$20,000 after five years, and it incurs $10,000 in maintenance fees each year. Calculate the EAC based on a discount rate of 5%.

   Hint

   Remember to factor in market projections to reflect realistic expectations.