7.3. Next Lecture Preview

Try these first

1. 1.

   What is the definition of a defender in terms of replacement analysis?

   Hint

   Recall which term refers to your existing machinery.

2. 2.

   Explain what a sunk cost is.

   Hint

   Think about old expenses and decision making.

3. 3.

   What is considered when doing a replacement analysis?

   • Only initial costs
   • Current market values and ongoing costs
   • Sunk costs

   Hint

   Focus on what matters for today, not yesterday.

4. 4.

   Is it acceptable to include sunk costs in replacement analysis?

   • True
   • False

   Hint

   Think about costs you cannot recover.

5. 5.

   A company has a defender with an annual operating cost of 1,35,000 and a remaining life of 5 years. It can be sold for 6,00,000. If a challenger has an operating cost of 90,000 and costs 27,50,000, calculate the equivalent annual costs and recommend a course of action.

   Hint

   Remember to apply the right formulas for CRF and SFF in your calculations.

6. 6.

   Discuss a situation where retaining a defender might be favorable despite its costs, ensuring to quantify potential benefits.

   Hint

   Explore qualitative benefits that factor into decision-making.