1.5. Third-Party Approach in Replacement Analysis

Try these first

1. 1.

   Define the third-party approach in replacement analysis.

   Hint

   Think about who is evaluating the asset.

2. 2.

   What does the term sunk cost mean?

   Hint

   Consider expenses that no longer affect your current decisions.

3. 3.

   What is the primary value considered in the third-party approach?

   • A) Historical Cost
   • B) Current Market Value
   • C) Book Value

   Hint

   Think about what would matter to someone evaluating the asset today.

4. 4.

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

   • True
   • False

   Hint

   Consider what affects current decisions versus past expenses.

5. 5.

   A company invested $100,000 in a machine that now has a market value of$30,000 after five years. If future operating costs are expected to rise to $15,000 annually after year five, determine whether the company should replace the machine or not.

   Hint

   Factor in ongoing costs versus what the machine could currently sell for.

6. 6.

   A contractor has a piece of equipment with a current fair market value of $25,000 and is expecting to incur repair costs of$18,000 in the next year. Analyze if replacement could be beneficial.

   Hint

   Balance current value against looming expenses to decide.