Podcast
Questions and Answers
Which of the following is NOT a reason for replacing an asset?
Which of the following is NOT a reason for replacing an asset?
Phasing out old technology due to efficiency improvements is a reason for replacement.
Phasing out old technology due to efficiency improvements is a reason for replacement.
True
What is the term used when the existing asset does not have enough capacity to meet current demands?
What is the term used when the existing asset does not have enough capacity to meet current demands?
Inadequacy
One major reason for replacement is __________, where the asset is completely or partially worn out.
One major reason for replacement is __________, where the asset is completely or partially worn out.
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Match each reason for replacement with its description:
Match each reason for replacement with its description:
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What factor must be considered when making a replacement decision?
What factor must be considered when making a replacement decision?
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Replacement decisions can only focus on economic factors.
Replacement decisions can only focus on economic factors.
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What is a common term used for replacing assets due to their age or wear?
What is a common term used for replacing assets due to their age or wear?
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What is the difference between unamortized value and book value?
What is the difference between unamortized value and book value?
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The annual maintenance cost of a new building is greater than that of an enlarged structure.
The annual maintenance cost of a new building is greater than that of an enlarged structure.
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What is the salvage value of the new factory?
What is the salvage value of the new factory?
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The unamortized value should be considered a __________ cost.
The unamortized value should be considered a __________ cost.
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Match the following components with their corresponding values or descriptions:
Match the following components with their corresponding values or descriptions:
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What is the estimated annual cost of fuel and lubricants with the new engine?
What is the estimated annual cost of fuel and lubricants with the new engine?
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The reconditioned engine has a higher total annual cost than the new engine.
The reconditioned engine has a higher total annual cost than the new engine.
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What is the annual depreciation cost for the reconditioned engine?
What is the annual depreciation cost for the reconditioned engine?
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The present realizable value of the unit now in use is P______.
The present realizable value of the unit now in use is P______.
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What is the difference in annual repair costs between the new engine and the reconditioned engine?
What is the difference in annual repair costs between the new engine and the reconditioned engine?
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Match the following engines to their annual total costs:
Match the following engines to their annual total costs:
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What is the estimated salvage value of a unit at retirement age expressed as a percentage of the original cost?
What is the estimated salvage value of a unit at retirement age expressed as a percentage of the original cost?
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The interest rate used in the calculations is 25%.
The interest rate used in the calculations is 25%.
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The old engine should not be replaced according to the cost analysis.
The old engine should not be replaced according to the cost analysis.
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What is the useful life of the new ore-crushing unit?
What is the useful life of the new ore-crushing unit?
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Calculate the annual taxes and insurance for an original cost of P81,000.
Calculate the annual taxes and insurance for an original cost of P81,000.
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The annual savings when buying the new small unit is ______________.
The annual savings when buying the new small unit is ______________.
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Match the following units with their total annual costs:
Match the following units with their total annual costs:
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What is the total annual cost for the new big unit?
What is the total annual cost for the new big unit?
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What is the return on additional investment (ROR) for buying the new small unit?
What is the return on additional investment (ROR) for buying the new small unit?
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The operation cost for the old unit is higher than that of the new small unit.
The operation cost for the old unit is higher than that of the new small unit.
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What is the total annual cost for the enlarged building?
What is the total annual cost for the enlarged building?
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The rate of return on the additional investment is 8 percent.
The rate of return on the additional investment is 8 percent.
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How much does it cost to rebore and recondition the old engine?
How much does it cost to rebore and recondition the old engine?
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The estimated life of a new engine is ______ years.
The estimated life of a new engine is ______ years.
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Match the following buildings with their total annual costs:
Match the following buildings with their total annual costs:
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Which investment was determined to be more attractive?
Which investment was determined to be more attractive?
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Reducing the annual savings by P225,263 results in a higher total annual cost.
Reducing the annual savings by P225,263 results in a higher total annual cost.
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What is the original cost of the old engine?
What is the original cost of the old engine?
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What is the operating expense for Year 2?
What is the operating expense for Year 2?
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The car should be replaced at the end of Year 1 to minimize costs.
The car should be replaced at the end of Year 1 to minimize costs.
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What is the interest rate on invested capital?
What is the interest rate on invested capital?
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The total cost in Year 3 is P______.
The total cost in Year 3 is P______.
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Match the years with their total costs:
Match the years with their total costs:
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What is the EUAC (equivalent uniform annual cost) for keeping the car for 3 years?
What is the EUAC (equivalent uniform annual cost) for keeping the car for 3 years?
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Depreciation decreases over the years as the car ages.
Depreciation decreases over the years as the car ages.
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Study Notes
Chapter 7: Replacement Analysis
- Replacement analysis is crucial for businesses needing to replace equipment over decades due to wear, obsolescence, or expansion needs.
- Replacement decisions are complex, needing consideration of asset factors like productivity, maintenance, and economic aspects.
- Key learning objectives include determining the economic life of assets and evaluating existing assets for potential replacement.
Major Reasons for Replacement
- Physical Impairment: Existing assets are worn out and require extensive repairs to function, making replacement necessary.
- Inadequacy: Assets lack sufficient capacity to meet current demands, indicating a need for increased capacity or replacement.
- Obsolescence: Declining demand for the asset's services or the availability of newer, more efficient assets with lower costs drive obsolescence and necessitate replacement.
- Rental or Lease Possibilities: Renting or leasing an asset can free up capital for other uses, making it a viable option in certain circumstances.
Sunk Cost Due to Unamortized Value
- Unamortized value is the difference between an asset's book value and its resale value when replaced.
- Unamortized value should be considered a sunk cost or loss.
Basic Patterns for Replacement Studies
- Replacement economy studies use established procedures or patterns to analyze replacement considerations.
- The rate of return method and annual cost method are frequently used tools.
Sample Problems (Illustrative examples of replacement decision-making)
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Examples presented involve scenarios such as expanding factories, replacing equipment, and choosing between rebating or replacing a machine, highlighting considerations and detailed calculations, including depreciation, maintenance, and interest rates.
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There are numerous problem scenarios illustrated for different situations.
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Description
Explore the key concepts surrounding replacement analysis in this chapter, focusing on the economic life of assets and the various reasons businesses might need to replace equipment. Discover how factors like physical impairment, inadequacy, obsolescence, and leasing impact replacement decisions. This quiz will enhance your understanding of asset management in a business context.
