Question 1

In order to make a replacement decision, a firm calculated the equivalent annual cost of owning an asset as follows:   When should the firm replace its equipment?

Accepted Answer

A) in 1 year 
B) in 2 years 
C) in 3 years 
D) in 4 years 
E) in 5 years 
A) in 1 year 
B) in 2 years 
C) in 3 years 
D) in 4 years 
E) in 5 years D

Question 2

A trucking company evaluates its fleet of vehicles. According to its balance sheet, a three-year-old van has the book value of $21 870. Currently its maintenance costs are $1 000 per year. They have increased by 20% annually and are expected to increase by the same percentage in the future. Calculate the equivalent annual costs for the first six years knowing that the van's purchase price was $30 000 and the minimum acceptable rate of return is 15%.

Accepted Answer

First it is necessary to calculate the depreciation rate d as follows:
d = 1 -   = 0.1 or 10%. The economic life is associated with the minimum Equivalent Annual Cost (EAC). EAC is calculated in the following table:
   Salvage value in year N = BV(N)= P(1 - d)N
Annual maintenance cost AMC in year N = AMC(N)= AMC(1)× (1 + 0.2)N. And we know that the maintenance cost in year 1 was 1000/1.22 = $694
Equivalent Annual Cost (Operating)for a lifetime of N years is
EAC(operating, N)=   × (A/P, i, N)
Equivalent Annual Cost (Capital)in any given year N is
EAC(capital, N)= (P - S)× (A/P, i, N)+ Si
The Equivalent Annual Cost is
EAC (N)= EAC(operating, N)+ EAC(capital, N)
where BV is the book value, P is the purchase price, S is the salvage value and i is the MARR.
From the table, the economic life of the van is at least 5 years.

Question 3

Maintenance costs are mostly a part of

Accepted Answer

A) fixed costs and as such should be included in the evaluation of EAC (Capital). 
B) fixed costs and as such should be included in the evaluation of EAC (Operating). 
C) variable costs and as such should be included in the evaluation of EAC (Capital). 
D) variable costs and as such should be included in the evaluation of EAC (Operating). 
E) Maintenance costs are neither fixed or variable costs and therefore, should be excluded from EAC calculations. 
A) fixed costs and as such should be included in the evaluation of EAC (Capital). 
B) fixed costs and as such should be included in the evaluation of EAC (Operating). 
C) variable costs and as such should be included in the evaluation of EAC (Capital). 
D) variable costs and as such should be included in the evaluation of EAC (Operating). 
E) Maintenance costs are neither fixed or variable costs and therefore, should be excluded from EAC calculations. D

Question 4

OMON Consulting is evaluating different scenarios to replace its existing technological line to produce compact computer discs. A four-year time horizon is used in this evaluation. One challenger is available at present, and it is expected that a new technology will be available in two years. List all potential scenarios associated with this evaluation.

Accepted Answer

The following table

Question 5

In order to make a replacement decision when the defender and the challenger are identical, one should assume that

Accepted Answer

A) the economic lives of the assets are very long relative to the planning time horizon. 
B) the technology can be changed during the economic life of an asset. 
C) the relative price and interest rate vary over time. 
D) the replacement decision is repeated an indefinitely large number of times. 
E) the defender and the challenger are made using different technologies. 
A) the economic lives of the assets are very long relative to the planning time horizon. 
B) the technology can be changed during the economic life of an asset. 
C) the relative price and interest rate vary over time. 
D) the replacement decision is repeated an indefinitely large number of times. 
E) the defender and the challenger are made using different technologies.

Question 6

The University has just invested $9 000 in a new desktop publishing system. From past experience, annual cash returns are estimated asA(t)= $8000 - $4000(1 + 0.15)t-1S(t)= $6000(1 - 0.3)twhere A(t)stands for the net cash flow in period t and S(t)stands for the salvage value at the end of year t, and t ≥ 1.If the MARR is 12%, compute the annual equivalent cost in year 2

Accepted Answer

We calculate salvage value in year 2 as

Question 7

You are considering purchase of a new furnace. Its initial cost, including installation, is $3 000, and it will cost $200 a year in fuel over its 10-year life. You expect that it can then be sold for $300. If your MARR is 10%, what is the equivalent annual cost of owning the furnace?

Accepted Answer

A) $469 
B) $569 
C) $669 
D) $769 
E) $869 
A) $469 
B) $569 
C) $669 
D) $769 
E) $869

Question 8

This table gives the data relevant to a replacement decision:   What is the Salvage Value in year 4 at the MARR of 10%?

Accepted Answer

A) $10 640 
B) $10 850 
C) $11 030 
D) $11 210 
E) $11 490 
A) $10 640 
B) $10 850 
C) $11 030 
D) $11 210 
E) $11 490

Question 9

What is the economic life of the following asset, given that its purchase price is   and the MARR = 10%?

Accepted Answer

A) more than 4 years since EAC is increasing over 4 years 
B) 1 year and EAC = $46 000 
C) 2 years and EAC = $45 048 
D) 3 years and EAC = $47 147 
E) 4 years and EAC = $45 000 
A) more than 4 years since EAC is increasing over 4 years 
B) 1 year and EAC = $46 000 
C) 2 years and EAC = $45 048 
D) 3 years and EAC = $47 147 
E) 4 years and EAC = $45 000

Question 10

Suppose that operating costs associated with the 5-year service life of an asset start with $1 000 in the first year increasing by $500 thereafter. Calculate the EAC(Operating)if annual rate is 10%.

Accepted Answer

A) $1 505 
B) $1 905 
C) $2 005 
D) $2 105 
E) $2 205 
A) $1 505 
B) $1 905 
C) $2 005 
D) $2 105 
E) $2 205

Question 11

An asset has an initial cost of $10 000. Its maintenance costs are $300 in the first year, and go up by 20% per year thereafter. Its salvage value declines by straight-line depreciation over ten years. If your MARR is 10%, what is its economic life?

Accepted Answer

A) 2 years 
B) 3 years 
C) 4 years 
D) 5 years 
E) 6 years 
A) 2 years 
B) 3 years 
C) 4 years 
D) 5 years 
E) 6 years

Question 12

A new laptop has just come onto the market that you estimate will have an equivalent annual cost of $500. You could sell your current laptop right away for $1 000, or you could spend $500 on an upgrade. At the end of this year, after the upgrade, it will have a resale value of $800, going down by $200 a year. Once its salvage value reaches zero, its physical life is over. If both laptops provide equivalent functionality, when should you replace your current laptop? Your MARR is 5%.

Accepted Answer

A) Replace it now. 
B) Replace it in 2 years. 
C) Replace it in 3 years. 
D) Replace it in 4 years. 
E) Replace it in 5 years. 
A) Replace it now. 
B) Replace it in 2 years. 
C) Replace it in 3 years. 
D) Replace it in 4 years. 
E) Replace it in 5 years.

Question 13

Define the concept of the economic life of an asset and describe the circumstances under which the concept is applied to replacement decisions.

Accepted Answer

The economic life of a physical asset is

Question 14

Which of the following can be called the defender?

Accepted Answer

A) a building that a company owns 
B) a bank account that a company owns 
C) a loan that a company has just taken from a bank 
D) a fleet of trucks that a company is currently planning to purchase 
E) a share held by a company 
A) a building that a company owns 
B) a bank account that a company owns 
C) a loan that a company has just taken from a bank 
D) a fleet of trucks that a company is currently planning to purchase 
E) a share held by a company

Question 15

A Tata costs $10 000, its salvage value declines by straight-line depreciation of $1 250 per year, and its maintenance costs are $100 in the first year and go up by 50% a year. Raj and Rashid both like to drive Tata's. Raj trades her car in for a new model when it reaches its economic life, whereas Rashid keeps his until it reaches the end of its physical life. Raj and Rashid both have MARRs of 5%. How much more does Rashid pay for his Tata per year, on average, than Raj?

Accepted Answer

A) They both pay the same. 
B) $53 
C) $64 
D) $77 
E) $112 
A) They both pay the same. 
B) $53 
C) $64 
D) $77 
E) $112

Question 16

What are the two conditions behind the One Year Principle?

Accepted Answer

A) Capital costs for a defender are small compared to the operating costs, and the annual operating costs are gradually increasing. 
B) Capital costs for a defender are higher than the operating costs, and the annual operating costs are gradually increasing. 
C) Capital costs for a defender are less than the operating costs, and the increase in annual operating costs is not monotonic. 
D) Capital costs for a defender are higher than the operating costs, and the increase in annual operating costs is not monotonic. 
E) Capital costs for a defender are less than the operating costs, and the annual operating costs are monotonically declining. 
A) Capital costs for a defender are small compared to the operating costs, and the annual operating costs are gradually increasing. 
B) Capital costs for a defender are higher than the operating costs, and the annual operating costs are gradually increasing. 
C) Capital costs for a defender are less than the operating costs, and the increase in annual operating costs is not monotonic. 
D) Capital costs for a defender are higher than the operating costs, and the increase in annual operating costs is not monotonic. 
E) Capital costs for a defender are less than the operating costs, and the annual operating costs are monotonically declining.

Question 17

If a challenger is different from the defender, and the challenger does not repeat, replacement decision should be based on

Accepted Answer

A) economic life of the first challenger only. 
B) comparison of the defender with the last challenger. 
C) marginal costs of the sequence of all challengers. 
D) all possible combinations of the defender and all challengers over some study period. 
E) installation costs of all challengers. 
A) economic life of the first challenger only. 
B) comparison of the defender with the last challenger. 
C) marginal costs of the sequence of all challengers. 
D) all possible combinations of the defender and all challengers over some study period. 
E) installation costs of all challengers.

Question 18

When making a replacement decision

Accepted Answer

A) capital costs of the challenger are irrelevant. 
B) capital costs of the defender are irrelevant. 
C) operating costs of the defender are irrelevant. 
D) capital costs of the defender incurred in the past are irrelevant. 
E) operating costs of the challenger are irrelevant. 
A) capital costs of the challenger are irrelevant. 
B) capital costs of the defender are irrelevant. 
C) operating costs of the defender are irrelevant. 
D) capital costs of the defender incurred in the past are irrelevant. 
E) operating costs of the challenger are irrelevant.

Question 19

A stamping machine currently has a salvage value of $10 000, and this will drop by 20% per year from now on. Its expected maintenance costs are $1 000 for this year, but in the following year it is expected to need a major overhaul, costing $3 500. In the year following the overhaul, its maintenance costs will be $500, and these will then go up by 30% per year. Your MARR is 10%. There is a challenger available that will do the same job for an EAC of $3 400. When should you replace the old machine?

Accepted Answer

A) right now 
B) in two years time 
C) in four years time 
D) in six years time 
E) in eight years time 
A) right now 
B) in two years time 
C) in four years time 
D) in six years time 
E) in eight years time

Question 20

A company bought and installed an assembly line for $5 million and $0.5 million respectively. The company plans to use this assembly line for 8 years and then sell it for $100 000. Calculate the equivalent annual capital costs of the assembly line if the capital recovery factor is 0.1874, and MARR is 10% for the capital investment.

Accepted Answer

A) $0.997 million 
B) $1.012 million 
C) $1.022 million 
D) $1.027 million 
E) $1.046 million 
A) $0.997 million 
B) $1.012 million 
C) $1.022 million 
D) $1.027 million 
E) $1.046 million

In order to make a replacement decision, a firm calculated the equivalent annual cost of owning an asset as follows: When should the firm replace its equipment?

Maintenance costs are mostly a part of

In order to make a replacement decision when the defender and the challenger are identical, one should assume that

You are considering purchase of a new furnace. Its initial cost, including installation, is $3 000, and it will cost $200 a year in fuel over its 10-year life. You expect that it can then be sold for $300. If your MARR is 10%, what is the equivalent annual cost of owning the furnace?

This table gives the data relevant to a replacement decision: What is the Salvage Value in year 4 at the MARR of 10%?

What is the economic life of the following asset, given that its purchase price is and the MARR = 10%?

Suppose that operating costs associated with the 5-year service life of an asset start with $1 000 in the first year increasing by $500 thereafter. Calculate the EAC(Operating)if annual rate is 10%.

An asset has an initial cost of $10 000. Its maintenance costs are $300 in the first year, and go up by 20% per year thereafter. Its salvage value declines by straight-line depreciation over ten years. If your MARR is 10%, what is its economic life?

Define the concept of the economic life of an asset and describe the circumstances under which the concept is applied to replacement decisions.

Which of the following can be called the defender?

What are the two conditions behind the One Year Principle?

If a challenger is different from the defender, and the challenger does not repeat, replacement decision should be based on

When making a replacement decision

Engineering Decision Making

Time Value of Money

Cash Flow Analysis

Comparison Methods: Part I

Comparison Methods: Part Ii

Financial Accounting and Business Plans

Taxes

Inflation

Public Sector Decision Making

Project Management

Dealing With Uncertainty and Risk

Filters

Exam 7: Replacement Decisions

In order to make a replacement decision, a firm calculated the equivalent annual cost of owning an asset as follows: When should the firm replace its equipment?

Maintenance costs are mostly a part of

In order to make a replacement decision when the defender and the challenger are identical, one should assume that

You are considering purchase of a new furnace. Its initial cost, including installation, is $3 000, and it will cost $200 a year in fuel over its 10-year life. You expect that it can then be sold for $300. If your MARR is 10%, what is the equivalent annual cost of owning the furnace?

This table gives the data relevant to a replacement decision: What is the Salvage Value in year 4 at the MARR of 10%?

What is the economic life of the following asset, given that its purchase price is and the MARR = 10%?

Suppose that operating costs associated with the 5-year service life of an asset start with $1 000 in the first year increasing by $500 thereafter. Calculate the EAC(Operating)if annual rate is 10%.

An asset has an initial cost of $10 000. Its maintenance costs are $300 in the first year, and go up by 20% per year thereafter. Its salvage value declines by straight-line depreciation over ten years. If your MARR is 10%, what is its economic life?

Define the concept of the economic life of an asset and describe the circumstances under which the concept is applied to replacement decisions.

Which of the following can be called the defender?

What are the two conditions behind the One Year Principle?

If a challenger is different from the defender, and the challenger does not repeat, replacement decision should be based on

When making a replacement decision

Engineering Decision Making

Time Value of Money

Cash Flow Analysis

Comparison Methods: Part I

Comparison Methods: Part Ii

Financial Accounting and Business Plans

Taxes

Inflation

Public Sector Decision Making

Project Management

Dealing With Uncertainty and Risk

Filters