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Hello Sir,
I am preparing for Dec exam, I have a doubt on this question. I am following becker revision kit, what i understood from your lecture that in repalcement first we have to find NPV and then have to calculate EAC(equivalent annual cost), and which ever is lowest cost will give the answer.In this question when i checked the answer , it calculated differently
1 2 3
service cost 10000 14000 19600
cleaning cost 5000 6250 7813total cost
discount fact .909 .826 .751pv of the cost 13636 16727 20587
Replacement cycle
cost of new vehiclles 150,000 150,000 150,000
pv of year1costs 13635 13635 13635
pv of year 2 cost 16727 16727
pv of year 3 cost 20587sum of pv of costs 163635 180362 200949
less : pv of trade in value 102263 74340 46562
(11250*10*.909)net pv of the cost of cycle 61372 106022 154387
annuity factor 0.909 1.736 2.487EAC 67516 61073 62078
I didnt understand why they added 150000,cost because isnt it a sunk cost?
why do we have to add PV cumulatively.Please help me with the answer in your style.thank you
But the answer has been calculated in exactly the same why as I do it in my lectures.
The 150,000 initial cost is certainly not a sunk cost – it has to be paid every time that the machine is replaced.
I suggest that you watch my lectures again – you will see that it is done in exactly the same way.
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