1. Equivalent Annual Cost Calculation

Try these first

1. 1.

   What does EAC stand for?

   Hint

   Think about the definition of annualized cost.

2. 2.

   Define USCRF in relation to EAC.

   Hint

   It's a method of recovery over time.

3. 3.

   What is the purpose of calculating the EAC?

   • To determine total costs
   • To minimize accounting inaccuracies
   • To compare replacement options

   Hint

   Think about how businesses choose to manage equipment.

4. 4.

   True or False: The EAC is only focused on the purchase price of the equipment.

   • True
   • False

   Hint

   Recall the definition of EAC.

5. 5.

   A company has a machine with a purchase price of 1,500,000 rupees, an expected life of 5 years, an O&M cost of 200,000 rupees per year, and a salvage value of 100,000 rupees. Calculate the EAC if the USCRF is 0.25.

   Hint

   Break down the problem into parts: calculate EAC then adjust for O&M and salvage.

6. 6.

   Analyze how the firm's decision to ignore salvage value might affect their assessment of a machine's cost-effectiveness, using an example.

   Hint

   Think critically about cash flows and their implications.