3.2. Conversion of Initial Cost to EAC

Try these first

1. 1.

   What is the initial cost of the defender?

   Hint

   Refer to the current market value mentioned.

2. 2.

   Identify the annual operating cost for the challenger.

   Hint

   It is the lower operating cost compared to the defender.

3. 3.

   What does EAC stand for?

   • Effective Annual Cost
   • Equivalent Annual Cost
   • End Annual Cost

   Hint

   Think about the acronym; what makes sense in terms of annual costs?

4. 4.

   Is it necessary to consider sunk costs when evaluating equipment replacement?

   • True
   • False

   Hint

   Consider if historical expenses influence current financial decisions.

5. 5.

   Given a machine with a higher salvage value but increased operating costs, analyze if a company should keep the original or replace it. Justify your decision using EAC.

   Hint

   Compare the EACs - the lower one should guide your decision.

6. 6.

   If a new piece of equipment saves ₹50,000 in annual operating costs, but costs ₹1,00,000 more upfront than the existing asset, calculate the impact on EAC over 5 years.

   Hint

   Factor in both upfront and recurring costs to justify the decision.