5.1. Cash Flow Diagram for Challenger

Try these first

1. 1.

   What is the annual operating cost of the defender?

   Hint

   Look for the information given about the defender's costs.

2. 2.

   What should you avoid considering in replacement analysis?

   Hint

   Think about costs that are already spent.

3. 3.

   What is the annual operating cost of the challenger?

   • ₹1,35,000
   • ₹90,000
   • ₹12,00,000

   Hint

   Refer back to the operating cost specifics mentioned.

4. 4.

   True or False: The salvage value of the defender is higher than the challenger.

   • True
   • False

   Hint

   Recall the values given for both the equipment.

5. 5.

   You are tasked with suggesting whether to replace the defender with the challenger or not. Calculate the long-term cost implications if the cash flows appear over a period of 5 years, considering the given values.

   Hint

   Use the given formulas for EAC and ensure you include all components in your analysis.

6. 6.

   If the annual operating cost of the defender increases by 10% over the next year, what should the revised recommendation be?

   Hint

   Calculate the increased operating cost and compare with the challenger. Include the effects of compounding over the 5 years.