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Click on each question to check your answer.
1. Identify the three reasons for replacing the existing asset.
They are: obsolescence, depletion, and deterioration. (p. 410)
2. Describe the major steps for conducting a replacement analysis flow chart.
First, identify the alternatives; second, determine whether we have marginal cost data for the defender; finally, apply the appropriate replacement analysis technique in different circumstances. (p. 411)
3. What are the major assumptions underlying the replacement analysis techniques?
It is assumed that the best challenger will be available with same minimum EUAC in the future, and the period is infinite. (pp. 417-418)
4. Compare the three different replacement analysis techniques.
If marginal cost data are available and increasing each year, replacement analysis technique 1 is used to compare the defender’s marginal cost with challengers’ minimum EUAC. If marginal cost data exist but not increasing each year, replacement analysis technique 2 is applied to compare the smallest EUAC of the defender with the minimum EUAC of the challenger. If marginal cost does not exist, replacement analysis technique 3 is conducted to compare the defenders’ EUAC over its duration with the challenger’s minimum EUAC. (pp. 416-417, pp. 418-419, p. 422)
5. Explain briefly the role of first cost plays in replacement analysis.
Assign correctly of the opportunity first cost to the defender, which refers to the current market value forgone to keep the defender, to reach a correct decision of replacement analysis. (p. 423)