4.2 - Current Value and Sunk Cost Analysis
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Practice Questions
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Define Equivalent Annual Cost (EAC).
💡 Hint: Think about how costs can be distributed across years.
What is a sunk cost?
💡 Hint: Consider costs that have already been spent on prior decisions.
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Interactive Quizzes
Quick quizzes to reinforce your learning
What does EAC stand for?
💡 Hint: It relates to how costs can be annualized.
True or False: Sunk costs should be included when making a decision about a future investment.
💡 Hint: Remember what happens when money is spent.
1 more question available
Challenge Problems
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A firm is choosing between two different systems, System A with an upfront cost of $200,000 for a lifetime of 15 years, and System B costing $180,000 lasting 12 years. Account for salvage values of $20,000 for both. Which has the lower EAC at a discount rate of 5%? Show detailed calculations.
💡 Hint: Focus on how future costs are transformed into annual costs!
A manufacturer invested $1 million into machinery, with operating costs projected to be $150,000/year. After 7 years, they can sell the machinery for $100,000. If the EAC is higher than anticipated, discuss potential business strategies to mitigate losses.
💡 Hint: Look towards future opportunities rather than past investments to make cost-effective decisions.
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