1.4. Important Points in Replacement Analysis

Try these first

1. 1.

   What is the primary focus of the third-party perspective in replacement analysis?

   Hint

   Think about what matters to an outsider evaluating the machine.

2. 2.

   Define what a sunk cost is in the context of replacement analysis.

   Hint

   Consider costs that don't impact future decisions.

3. 3.

   What should be the primary focus in replacement analysis according to the third-party perspective?

   • Initial purchase cost
   • Current market value
   • Book value in accounting records

   Hint

   Think about what information influences current decisions.

4. 4.

   True or False: Sunk costs are essential for future financial decisions.

   • True
   • False

   Hint

   Recall how past costs affect current decisions.

5. 5.

   Consider two machines: Machine A purchased for 10,00,000 with a current value of 4,00,000 and increasing maintenance costs versus Machine B costing 5,00,000 with lower operational costs. Evaluate whether to replace Machine A with Machine B, assuming similar resale values.

   Hint

   Evaluate the trade-offs in operational efficiency and cost before making a decision.

6. 6.

   You have an old excavator bought for 15,00,000, now worth 3,00,000. It incurs annual operating costs of 2,00,000, but a new one at 12,00,000 with operating costs of 1,00,000. Calculate EAC for both and determine the better option.

   Hint

   Remember to incorporate the time value of money in your calculations.