3.3. Calculation of Operating and Maintenance Costs

Try these first

1. 1.

   What is considered an operating cost?

   Hint

   Think about daily running costs.

2. 2.

   What does salvage value represent?

   Hint

   It's like the final price when selling something used.

3. 3.

   What is the annual operating cost of the challenger?

   • 90,000
   • 135,000
   • 100,000

   Hint

   Look back to the initial costs mentioned.

4. 4.

   Is the defender's initial cost relevant in the replacement analysis?

   • True
   • False

   Hint

   Consider which costs are current versus past.

5. 5.

   A piece of machinery has a purchase price of 50,000 with an annual operating cost of 10,000 and salvage value of 5,000 after 4 years. If the interest rate is 6%, compute the EAC.

   Hint

   Use formulas for Pv and annualize them.

6. 6.

   Scenario: Two machines have the following details: Machine A costs 25,000, with operating costs of 3,000, salvage at 2,000 over 5 years; Machine B costs 20,000, with 2,500 operating and 1,500 salvage value. Which machine is preferable and why, based on EAC?

   Hint

   Focus on annualizing those costs.