3.1. Determining the Economic Life of the Machine

Try these first

1. 1.

   What is the definition of Equivalent Annual Cost (EAC)?

   Hint

   Think about how it reflects costs over time.

2. 2.

   How do we convert future costs to present worth?

   Hint

   Consider the formula for calculating present value.

3. 3.

   What is the formula to calculate EAC?

   • EAC = USCRF × Purchase Price
   • EAC = Purchase Price / USCRF
   • EAC = Purchase Price + Operating Costs

   Hint

   Consider which variables you are using in this calculation.

4. 4.

   True or False: The salvage value increases the total cost.

   • True
   • False

   Hint

   Think about how salvage works in financial assessments.

5. 5.

   A company has a machine worth 5,000,000 Rs. that incurs annual O&M costs of 300,000 Rs. at an interest rate of 10%. Calculate the total EAC for 3 years including a salvage value of 1,000,000 Rs.

   Hint

   Break down the problem into steps focusing on each cost component.

6. 6.

   Discuss a scenario where opting for a replacement before the machine’s economic life ends could save costs. Explain your rationale using EAC.

   Hint

   Identify savings categories that outweigh the benefits of keeping the older machine.