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Hello John,
Machine 1
Cost = $480,000
Lifetime= 4 Years
Scrap Value =$ 60000
Running costs = $72000Machine 2
Cost = $540000
Lifetime= 3 Years
Scrap Value =$ 120,000
Running costs = $47000– The EAC calculation assumes the capabilities of Machine 1 & 2 are identical.
1. Could you please explain how the statement is correct?
– The EAC is used when we replace identical asset; meaning that that capabilities are the same which is not the case for machine 1 & 2Thanks
Assuming that the capabilities of the two machines are identical simply means that the production (and therefore the sales revenue) will be the same whichever machine we choose.
Therefore we make the decision based simply on the costs in the normal way for assets replacement decisions.
I assume that you have watched my free lectures on asset replacement decisions?
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