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NB Power is considering replacing its existing electricity generator. The current market value of the generator is $15 000. It depreciates at 25% per year. The generator produces 153 megawatt-hours of electricity annually and requires $3 000 in maintenance costs per year. Moreover, the maintenance costs are expected to increase by $1 200 per year in the future. On the other hand, there is another generator in the market that provides electricity at $0.059 per kilowatt-hour. What should NB Power do if the MARR is 8%?

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If the old generator is kept for one mor...

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A three-year-old small crane is being considered for early replacement. Its current market value is $13 000. Estimated future market values and annual operating costs for the next five years are given in the following table: A three-year-old small crane is being considered for early replacement. Its current market value is $13 000. Estimated future market values and annual operating costs for the next five years are given in the following table: What is the economic life for this crane if the interest rate is 10% per year? What is the economic life for this crane if the interest rate is 10% per year?

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In order to find the economic life, it i...

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What is the equivalent annual cost (EAC) ?


A) annual cost of the initial investment in an asset spread over its economic life
B) average annual cost of owning and operating an asset over its economic life
C) the market cost of replacing the service provided by an asset
D) the sum of the asset's depreciation and its operating costs in any given year
E) the difference between the profits generated by an asset and the cost of operating it

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Capital costs are usually


A) variable costs that directly depend on the level of production.
B) fixed costs that do not directly depend on the level of production.
C) negligible compared with operating costs.
D) the most important factor in determining the economic life of an asset.
E) costs of administrative overhead.

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Shultz Ltd. produces portable electric band saws. Currently Shultz Ltd. pays its subcontractor $6.14 per power unit excluding material costs. It is expected that sales of the electric band saws will be as high as 7 500 per year. Should Shultz Ltd. produce power units itself if the equivalent annual cost for the company to install and run the production equipment would be $49 568?


A) Yes, because own production would be cheaper by $0.22 per unit.
B) Yes, because own production would be cheaper by $0.47 per unit.
C) No, because own production would be $0.57 per unit more expensive.
D) No, because own production would be $0.22 per unit more expensive.
E) No, because own production would be $0.47 per unit more expensive.

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What is the economic life of an asset?


A) the service life that accounts for the costs of an asset replacement
B) the service life that minimizes the marginal cost of an asset
C) the service life that maximizes revenues generated by an asset
D) the service life that minimizes the average cost of an asset over time
E) the service life that minimizes the cost of replacing the asset

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Which of the following can be called the challenger?


A) a revenue generated by a company
B) machinery that a company wants to acquire
C) an assembly line that a company wants to replace
D) a piece of land that a company owns
E) payments that a company receives from its clients

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This table gives the data relevant to a replacement decision: This table gives the data relevant to a replacement decision: What is the EAC (Capital Costs) for year 3 at the MARR of 10%? A) $16 840 B) $17 622 C) $18 181 D) $18 210 E) $19 460 What is the EAC (Capital Costs) for year 3 at the MARR of 10%?


A) $16 840
B) $17 622
C) $18 181
D) $18 210
E) $19 460

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A new computer costs $4 000. It depreciates at 15% annually. The computer maintenance costs are $200 in the first year increasing by 50% per year thereafter. Calculate the EAC over the first five years of the computer's life, assuming a 20% interest rate. What is the economic life of the computer?

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The following table summarizes all calcu...

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If the challenger is different from the defender, and the challenger does not repeat, what should one do to make an educated decision about replacement?


A) Compute the economic life and the associated EAC of all the challengers.
B) Compute the EAC of the remaining economic life of the defender.
C) Keep the defender.
D) Replace the defender by the challenger immediately.
E) Structure the problem as a set of mutually exclusive alternatives.

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A replacement study showed that the components of the total costs of an asset are as follows: A replacement study showed that the components of the total costs of an asset are as follows: What is the economic life of an asset? A) 7 years B) 7.5 years C) 8 years D) 9 years E) 12 years What is the economic life of an asset?


A) 7 years
B) 7.5 years
C) 8 years
D) 9 years
E) 12 years

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What is sunk cost? Explain how it affects replacement decisions.

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Sunk cost is the unrecoverable portion o...

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The salvage value of an electric generator is $10 000, while its purchase price five years ago was $20 000. It produces 45.5 megawatt-hours of electricity per year and requires $800 in annual maintenance costs. A new generator can produce electricity at $0.05 per kilowatt-hour. Should the new generator be purchased if the annual interest rate is 7%?

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Since information on the new generator i...

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TRINITY Ltd. produces different pieces of furniture. A set of electric drills used in the production of furniture wears out rapidly, after which the firm scraps them. Calculate the equivalent annual cost (capital costs) of a set of electric drills if the firm buys the set for $4 500 and uses it for 5 years. Assume an annual interest rate of 8%.


A) $900
B) $1 082
C) $1 127
D) $1 206
E) $1 284

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Capital cost per period


A) mostly falls with an increase in the service life of an asset.
B) always rises with an increase in the service life of an asset.
C) can decline at some point in the service life of an asset if it requires a major overhaul.
D) usually increases over time.
E) remains constant over time.

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If it is said that the economic life of a challenger is four years it means that


A) the payback period is four years.
B) four years are required for the challenger to recover its initial investment.
C) four years are required for the challenger to recover its operating and maintenance costs.
D) the equivalent annual cost in year four is at its minimum.
E) the equivalent annual cost is decreasing over four years.

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If the interest rate is 10%, the depreciation rate of an asset is 10%, its service life is 10 years and its first cost is $10 million then EAC(Capital) for a ten-year life is


A) $1.000 million.
B) $1.060 million.
C) $1.349 million.
D) $1.409 million.
E) $1.977 million.

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What asset will most likely contain sunk cost?


A) refrigerator
B) airplane
C) administrative building
D) rail tracks
E) auto repair equipment

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Which of the following can be treated as a part of installation costs?


A) the costs of purchasing new equipment
B) the costs of personnel retraining
C) the costs of the loss in capacity value
D) the difference between the purchase price and the salvage value
E) the initial investment

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A BMW costs $35 000, its salvage value declines by declining-balance depreciation of 10% per year, and its maintenance costs are $100 in the first year and go up by $500 a year. Mary and Tom both like to drive BMWs. Mary trades her car in for a new model every year, whereas Tom keeps his until it reaches its economic life, then trades it in. Mary and Tom both have MARRs of 5%. How much more does Mary pay for her car per year, on average, than Tom?


A) They each pay the same.
B) $569
C) $615
D) $769
E) $869

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