3.1. Machine Details and Cash Flow Diagrams

Try these first

1. 1.

   Define the term 'Equivalent Annual Cost.'

   Hint

   It involves annualizing all costs over the life of the equipment.

2. 2.

   What is meant by 'sunk costs'?

   Hint

   Consider what expenses you can't reclaim or change.

3. 3.

   What is the main purpose of replacement analysis?

   • To minimize costs associated with old machinery
   • To maximize historical expenses
   • To ignore the time value of money

   Hint

   Think about the financial aspects of maintaining versus replacing machinery.

4. 4.

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

   • True
   • False

   Hint

   Consider how much you can regain from previous investments.

5. 5.

   A construction company evaluates two trucks: Truck A costs 50,000 initially with a maintenance cost of 4,000 yearly, while Truck B costs 70,000 with 3,000 yearly maintenance. Assume a resale value of 20,000 for Truck A after five years and 25,000 for Truck B after five years. Calculate the EAC for both trucks and identify which truck would be more economical considering a 10% interest rate.

   Hint

   Use the formulas for Present Worth and Capital Recovery Factor effectively to find the answers.

6. 6.

   Discuss how ignoring market dynamics can significantly affect replacement analysis. Provide examples of cost implications when past values overshadow current pricing during decision-making.

   Hint

   List potential risks in financial outcomes from poor analysis to flesh out your answer.