3. Working out a Problem for Economic Life

Try these first

1. 1.

   What is replacement analysis?

   Hint

   Focus on its purpose in financial decisions.

2. 2.

   Define the term 'market value'.

   Hint

   Think about how an asset's worth is evaluated today.

3. 3.

   What is the primary goal of replacement analysis?

   • To maximize initial investments
   • To determine optimal replacement timing
   • To calculate resale value

   Hint

   Remember, it's about timing!

4. 4.

   True or False: Sunk costs are relevant to future financial decisions.

   • True
   • False

   Hint

   Focus on analyzing only current and future costs.

5. 5.

   A construction company is analyzing whether to replace a bulldozer bought for $200,000. It has an annual operating cost of$50,000. If its average resale value decreases to $90,000 after the first year, calculate the EAC and determine if it should be replaced.

   Hint

   Use present worth factors to determine EAC over the useful life of the bulldozer.

6. 6.

   A firm is deciding whether to keep an old crane with a persistent annual maintenance cost of $30,000. New models cost$150,000 with an expected annual operating cost of $10,000. Calculate EAC and discuss potential benefits.

   Hint

   Consider running calculations over the crane’s anticipated useful life.