3. Equivalent Annual Cost Calculation for Defender

Try these first

1. 1.

   What is the operational cost of the Defender?

   Hint

   Refer to the section where the operating costs were introduced.

2. 2.

   Define salvage value.

   Hint

   Think about how equipment can still have some value after it is no longer used.

3. 3.

   What is the operating cost of the Challenger?

   • INR 90,000
   • INR 1,00,000
   • INR 80,000

   Hint

   Look at how costs were mentioned for both machines.

4. 4.

   True or False: Sunk costs should be considered in replacement decisions.

   • True
   • False

   Hint

   Remember the definition and implications of sunk costs.

5. 5.

   Analyze how a sudden increase in maintenance costs for the Defender (to INR 2,00,000 per year) would affect the decision-making process compared to Challenger.

   Hint

   Utilize the updated operating cost in your calculation.

6. 6.

   Determine how inflation might shift the salvage values over a 5-year period for both equipment, leading you to propose a different financial strategy.

   Hint

   Consider using a percentage increase for annual salvage values.