4. Summary of Defender's Equivalent Annual Cost

Try these first

1. 1.

   Define defender in the context of equipment analysis.

   Hint

   Think about what equipment you are using presently.

2. 2.

   What does EAC stand for?

   Hint

   It is a term that helps compare costs over time.

3. 3.

   What does 'defender' refer to in equipment analysis?

   • Current equipment
   • Proposed equipment
   • Sunk costs

   Hint

   Think about which equipment you have now.

4. 4.

   True or False: Sunk costs should be included in the analysis for replacing equipment.

   • True
   • False

   Hint

   Consider if an expense you've incurred matters for decisions ahead.

5. 5.

   A company has a defender with an initial cost of 20,00,000, annual operating costs of 1,00,000, and a salvage value of 5,00,000 after 8 years. They are considering a challenger with an initial cost of 25,00,000 with a 6,00,000 salvage value and operating costs of 80,000 annually. Calculate the equivalent annual cost for both and determine which is preferable.

   Hint

   Use the uniform series factors for both EAC calculations based on time and costs.

6. 6.

   Determine the financial impacts if the defender's salvage value unexpectedly decreases to 3,00,000. Would this affect the decision to keep it or switch to the challenger?

   Hint

   Look closely at how the changes to salvage affect the bottom line.