7.1. Summary of Replacement Analysis Principles

Try these first

1. 1.

   What is replacement analysis?

   Hint

   Think about the decision-making process in budgeting.

2. 2.

   Define sunk cost.

   Hint

   Consider the costs of past investments.

3. 3.

   What should be ignored in replacement analysis?

   • Current market value
   • Sunk costs
   • Operating costs

   Hint

   These costs have already occurred.

4. 4.

   True or False: The equivalent annual cost accounts for future cash flows discounting.

   • True
   • False

   Hint

   Think about how future expenses relate to present finances.

5. 5.

   A company has an old machine with an annual operating cost of 1,35,000 and a current market value of 22,50,000. After 5 years, it will have a salvage value of 6,00,000. If a new machine has an operating cost of 90,000 and a market value of 12,00,000 after 5 years, compare both using EAC and recommend an actionable decision.

   Hint

   Compare calculated EAC values.

6. 6.

   Evaluate two construction machines: one has high operational costs but a significant salvage value while another is cheaper upfront with lower operational costs. How would you decide using replacement analysis?

   Hint

   Determine the economic life for accurate comparison.