6.1. Decision to Replace Defender with Challenger

Try these first

1. 1.

   What is the operating cost of the Challenger?

   Hint

   Look for the cost associated with maintaining the Challenger.

2. 2.

   What is a sunk cost?

   Hint

   Think about costs that are irrelevant to future decisions.

3. 3.

   What is the operating cost of the Defender?

   • Rs. 90,000
   • Rs. 1,35,000
   • Rs. 22,50,000

   Hint

   Focus on the comparison costs mentioned.

4. 4.

   True or False: The salvage value of the Challenger is more favorable than that of the Defender.

   • True
   • False

   Hint

   Look for the ending values after five years.

5. 5.

   Given the Defender's initial cost of Rs. 22,50,000 and a remaining useful life of 5 years, calculate the total cost of ownership if retained and compare it to the Challenger's costs.

   Hint

   Use total operational cost + next salvage value to ascertain which is lower.

6. 6.

   Discuss how ignoring sunk costs affects decision-making in a financial context. Provide an example where this principle can be applied outside machinery.

   Hint

   Consider projects that may require additional funding despite previous spending.