2.2. Relevant Costs for Replacement Analysis

Try these first

1. 1.

   What is the annual operating cost of the defender?

   Hint

   Refer back to the initial figures provided for each equipment.

2. 2.

   Define the term 'sunk cost.'

   Hint

   Think about costs that do not affect future decisions.

3. 3.

   What is the annual operating cost of the challenger?

   • 135,000
   • 90,000
   • 1,200,000

   Hint

   Reflect on the cost structure provided.

4. 4.

   True or False: Sunk costs impact future replacement decisions.

   • True
   • False

   Hint

   Think about whether these costs can be recovered.

5. 5.

   If the defender's current market value is 2,250,000, and the operating cost is 135,000 per year, calculate the total cost over five years without considering salvage value.

   Hint

   Remember to include both the market value and the total operational costs.

6. 6.

   Assuming both the defender and challenger undergo operational costs over a five-year period, how would you determine the best option among them, including all costs?

   Hint

   Utilize the EAC formula for both machines and compare the results.