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Which of the following statements about Care Co’s replacement decision are true
The decision between machine 1 and machine 2 could be found by calculating
total NPV of each machine over a 12 year period
can u plz explain how this is true sir?
How can I say without seeing the full question???
Maybe one of the machines is replaced every 3 years and the other is replaced every 4 years.
In that case looking at 12 years for both would include a whole number of replacements for each and would be repeated indefinitely. In that case the statement would be true.
i didnt get u sir !
kaplan is given this reason
Using the ‘lowest common multiple’ approach (12 years) is an alternative to simple
That is what I explained in my previous reply.
Given that 12 divides by both 3 and by 4, then it 12 years one machine will have been replaced 4 times and the other will have been replaced 3 times. Whichever it better when costed over 12 years must also be the best when the replacement is indefinite, because the same 12 year pattern will keep being repeated.
(If you are still not clear, then repeat the example in our free lecture notes costing out over just 6 years (because it will be either 1 year repeating 6 times, or 2 years repeating 3 times, or 3 years repeating 2 times). The best of the three replacement options will be the same one as I find to be the best in my lectures working through the example.