5.4. Summary of Challenger's Equivalent Annual Cost

Try these first

1. 1.

   What is the formula to calculate Equivalent Annual Cost?

   Hint

   Think about annualizing costs and using factors.

2. 2.

   What are sunk costs?

   Hint

   Consider costs that can't influence future decisions.

3. 3.

   What is the main purpose of calculating Equivalent Annual Cost?

   • To determine initial investment
   • To compare long-term costs of assets
   • To analyze salvage values

   Hint

   Think about long-term financial assessments.

4. 4.

   True or False: Sunk costs should be included in the replacement analysis.

   • True
   • False

   Hint

   Consider what costs can actually impact future decisions.

5. 5.

   A company has two machines: Machine A costs ₹5,00,000, has an operating cost of ₹1,00,000 per year, and a salvage value of ₹2,00,000 after 3 years. Machine B costs ₹3,00,000, with an operating cost of ₹50,000 per year and a salvage value of ₹1,00,000 after 3 years. Calculate the EAC for both machines and advise which machine the company should choose.

   Hint

   Use respective capital recovery and sinking fund factors to find EAC.

6. 6.

   An organization decides to replace its old equipment. The old equipment has a market value of ₹4,00,000, annual maintenance costs of ₹2,00,000, and is expected to last for another 5 years. The new equipment costs ₹6,00,000, has an annual maintenance cost of ₹1,50,000, and a salvage value of ₹3,00,000. What would be the EAC for both pieces of equipment, and which should they keep?

   Hint

   Remember to consider future salvage values while calculating EAC.