5.3. Salvage Value Conversion to EAC for Challenger

Try these first

1. 1.

   What does EAC stand for?

   Hint

   It's a term we use to compare costs over an asset's life.

2. 2.

   Why should sunk costs be ignored in our analysis?

   Hint

   Think about the costs already spent.

3. 3.

   What is the primary purpose of calculating EAC?

   • To determine depreciation
   • To estimate annual costs of equipment
   • To find the salvage value

   Hint

   Consider why you'd want to see costs in a yearly perspective.

4. 4.

   Sunk costs should influence your decision about keeping or replacing equipment.

   • True
   • False

   Hint

   Think about whether these costs can be changed now.

5. 5.

   A company has two cranes: Crane A with an EAC of 7,00,000 and Crane B with an EAC of 5,50,000. If the interest rate doubles, calculate how the EAC might change for both cranes assuming similar cash flows.

   Hint

   Consider how higher interest rates affect annuity values.

6. 6.

   Given the challenger has an initial cost of 27,50,000 and an operating cost of 90,000, evaluate how much more the annual cost would be if the salvage value drops to 10,00,000 after 5 years compared to the current salvage estimate of 12,00,000.

   Hint

   Calculate the difference in EAC based on the changed salvage value.