4.3. New Estimates and Remaining Life Considerations

Try these first

1. 1.

   What does EAC stand for?

   Hint

   Think about yearly financial metrics.

2. 2.

   What is the formula for calculating EAC?

   Hint

   Consider how we break down total costs.

3. 3.

   What does EAC help determine?

   • Annualized costs
   • Monthly costs
   • Total production cost

   Hint

   Think about yearly payments.

4. 4.

   Is resale value considered a cash outflow?

   • True
   • False

   Hint

   Consider how we account cash inflows and costs.

5. 5.

   Calculate the total EAC for a piece of machinery with a purchase price of 8,000,000, an expected annual operating cost of 200,000, a salvage value of 1,000,000, with a useful life of 7 years at an annual interest rate of 5%.

   Hint

   Factor in USCRF calculations and do adjustments for salvage.

6. 6.

   Discuss how a change in salvage value from 1,500,000 to 2,000,000 alters the economic analysis and decision on equipment replacement.

   Hint

   Assess the financial impact through cash flow implications.