Chapter 7: Replacement Analysis
44 Questions
1 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Which of the following is NOT a reason for replacing an asset?

  • Obsolescence
  • Physical impairment
  • Inadequacy
  • Improved operations (correct)

Phasing out old technology due to efficiency improvements is a reason for replacement.

True (A)

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.

<p>physical impairment</p> Signup and view all the answers

Match each reason for replacement with its description:

<p>Physical Impairment = Asset is worn out and requires extensive repairs Inadequacy = Asset does not meet current demands Obsolescence = Asset is less demanded or outperformed by more efficient assets Efficiency = Asset has become outdated affecting performance</p> Signup and view all the answers

What factor must be considered when making a replacement decision?

<p>Economic aspects (B)</p> Signup and view all the answers

Replacement decisions can only focus on economic factors.

<p>False (B)</p> Signup and view all the answers

What is a common term used for replacing assets due to their age or wear?

<p>Replacement analysis</p> Signup and view all the answers

What is the difference between unamortized value and book value?

<p>Unamortized value is the difference between book value and resale value. (D)</p> Signup and view all the answers

The annual maintenance cost of a new building is greater than that of an enlarged structure.

<p>True (A)</p> Signup and view all the answers

What is the salvage value of the new factory?

<p>P700,000</p> Signup and view all the answers

The unamortized value should be considered a __________ cost.

<p>sunk</p> Signup and view all the answers

Match the following components with their corresponding values or descriptions:

<p>Existing structure cost = P2.6 million Present book value = P700,000 Cost to alter structure = P1.6 million Life of a new factory = 20 years</p> Signup and view all the answers

What is the estimated annual cost of fuel and lubricants with the new engine?

<p>P17,000 (C)</p> Signup and view all the answers

The reconditioned engine has a higher total annual cost than the new engine.

<p>True (A)</p> Signup and view all the answers

What is the annual depreciation cost for the reconditioned engine?

<p>P4,071</p> Signup and view all the answers

The present realizable value of the unit now in use is P______.

<p>26,000</p> Signup and view all the answers

What is the difference in annual repair costs between the new engine and the reconditioned engine?

<p>P2,500 (D)</p> Signup and view all the answers

Match the following engines to their annual total costs:

<p>Reconditioned engine = P31,051 New engine = P29,828 Ore-crushing unit (existing) = P3,540 Ore-crushing unit (new, double capacity) = P4,950</p> Signup and view all the answers

What is the estimated salvage value of a unit at retirement age expressed as a percentage of the original cost?

<p>12% (B)</p> Signup and view all the answers

The interest rate used in the calculations is 25%.

<p>False (B)</p> Signup and view all the answers

The old engine should not be replaced according to the cost analysis.

<p>False (B)</p> Signup and view all the answers

What is the useful life of the new ore-crushing unit?

<p>6 years</p> Signup and view all the answers

Calculate the annual taxes and insurance for an original cost of P81,000.

<p>P2,025</p> Signup and view all the answers

The annual savings when buying the new small unit is ______________.

<p>P1,590</p> Signup and view all the answers

Match the following units with their total annual costs:

<p>Old Unit = P19,266 New Small Unit = P19,266 New Big Unit = P17,676 New Small Unit to Augment Old Unit = P19,266</p> Signup and view all the answers

What is the total annual cost for the new big unit?

<p>P17,676 (A)</p> Signup and view all the answers

What is the return on additional investment (ROR) for buying the new small unit?

<p>14.5%</p> Signup and view all the answers

The operation cost for the old unit is higher than that of the new small unit.

<p>False (B)</p> Signup and view all the answers

What is the total annual cost for the enlarged building?

<p>P509,227 (C)</p> Signup and view all the answers

The rate of return on the additional investment is 8 percent.

<p>False (B)</p> Signup and view all the answers

How much does it cost to rebore and recondition the old engine?

<p>P28,000</p> Signup and view all the answers

The estimated life of a new engine is ______ years.

<p>10</p> Signup and view all the answers

Match the following buildings with their total annual costs:

<p>Enlarged Building = P509,227 New Building = P253,964</p> Signup and view all the answers

Which investment was determined to be more attractive?

<p>Constructing the new building (A)</p> Signup and view all the answers

Reducing the annual savings by P225,263 results in a higher total annual cost.

<p>True (A)</p> Signup and view all the answers

What is the original cost of the old engine?

<p>P70,000</p> Signup and view all the answers

What is the operating expense for Year 2?

<p>P38,000 (C)</p> Signup and view all the answers

The car should be replaced at the end of Year 1 to minimize costs.

<p>False (B)</p> Signup and view all the answers

What is the interest rate on invested capital?

<p>15%</p> Signup and view all the answers

The total cost in Year 3 is P______.

<p>187,400</p> Signup and view all the answers

Match the years with their total costs:

<p>Year 1 = P316,000 Year 2 = P243,200 Year 3 = P187,400</p> Signup and view all the answers

What is the EUAC (equivalent uniform annual cost) for keeping the car for 3 years?

<p>P272,851</p> Signup and view all the answers

Depreciation decreases over the years as the car ages.

<p>True (A)</p> Signup and view all the answers

Flashcards

Replacement Analysis

The process of deciding when to replace an existing asset with a new one, considering factors like wear, obsolescence, and economic viability.

Economic Life

The period during which it is most cost-effective to operate an asset, considering both its initial cost and ongoing expenses.

Physical Impairment

The asset is worn out or damaged and needs significant repairs to continue functioning.

Inadequacy

The existing asset is not capable of meeting current demands.

Signup and view all the flashcards

Obsolescence

The asset is outdated or replaced by a newer, more efficient technology.

Signup and view all the flashcards

Evaluate Existing Assets

Assessing the current condition, performance, and remaining useful life of the asset.

Signup and view all the flashcards

Replacement Decision Factors

Factors that influence the decision of whether to replace an asset, such as cost, efficiency, and potential future benefits.

Signup and view all the flashcards

Economic Aspects of Replacement

Analyzing the financial implications of replacing an asset, including cost savings, increased productivity, and return on investment.

Signup and view all the flashcards

Unamortized Value

The difference between an asset's book value and its resale value. It represents a sunk cost.

Signup and view all the flashcards

Sunk Cost

A cost that has already been incurred and cannot be recovered.

Signup and view all the flashcards

Replacement Economy Studies

Analyzing whether to replace existing equipment or assets with newer ones based on economic factors.

Signup and view all the flashcards

Rate of Return Method

A replacement study method that calculates the expected rate of return on the investment in the new asset.

Signup and view all the flashcards

Annual Cost Method

A replacement study method that compares the total annual costs of keeping the old asset vs. the new one.

Signup and view all the flashcards

Depreciation (Enlarged Building)

The annual cost of the building's value decrease over its useful life. Calculated by dividing the building's cost minus its salvage value by the number of years of its useful life.

Signup and view all the flashcards

Annual Cost (Enlarged Building)

The total cost incurred annually for operating and maintaining the enlarged building. It includes depreciation, maintenance, and excess production costs.

Signup and view all the flashcards

Depreciation (New Building)

The annual cost of the building's value decrease over its useful life. Calculated by dividing the building's cost minus its salvage value by the number of years of its useful life.

Signup and view all the flashcards

Annual Cost (New Building)

The total cost incurred annually for operating and maintaining the new building. It includes depreciation and maintenance costs.

Signup and view all the flashcards

Annual Savings

The difference between the total annual costs of the enlarged building and the new building, representing the cost savings from choosing the new building.

Signup and view all the flashcards

Additional Investment

The extra capital required to purchase the new building compared to the cost of just enlarging the existing building, representing the initial price difference.

Signup and view all the flashcards

Rate of Return on Additional Investment

The percentage return generated from the additional investment in the new building, calculated by dividing the annual savings by the additional investment.

Signup and view all the flashcards

Decision Criteria

The decision to construct the new building is based on a higher rate of return on additional investment compared to simply enlarging the existing building.

Signup and view all the flashcards

Salvage Value

The estimated value of an asset at the end of its useful life.

Signup and view all the flashcards

Annual Costs

Expenses incurred on an asset over a year, including depreciation, operation, taxes, and insurance.

Signup and view all the flashcards

Depreciation

The decline in value of an asset over time.

Signup and view all the flashcards

Augmentation

Adding a new asset to an existing one to improve productivity or efficiency.

Signup and view all the flashcards

Total Annual Cost

The sum of all annual costs for an asset, including depreciation, operation, taxes, and insurance.

Signup and view all the flashcards

Replacement

Exchanging an old asset with a new one.

Signup and view all the flashcards

Return on Investment (ROI)

The percentage return on an investment, calculated as profit divided by the initial investment.

Signup and view all the flashcards

Capital Budgeting

The process of planning and managing a firm's long-term investments. This involves analyzing potential projects and deciding which ones to invest in.

Signup and view all the flashcards

Annual Operating Cost

The total cost incurred in running an asset over a year, including costs like fuel, repairs, maintenance, and other expenses related to its operation.

Signup and view all the flashcards

Present Realizable Value

The current market value of an asset if it were to be sold immediately. This is also known as the salvage value.

Signup and view all the flashcards

Net Realizable Value

The expected value of an asset after deducting all costs associated with selling it. This is used when determining the value of assets at the end of their useful life.

Signup and view all the flashcards

Interest Rate

The cost of borrowing money, expressed as a percentage. It is the return earned by lenders on their capital, and also represents the cost paid by borrowers for using borrowed funds.

Signup and view all the flashcards

Operating Expenses

The ongoing costs associated with running an asset, like fuel, maintenance, and repairs. These expenses occur annually.

Signup and view all the flashcards

Interest on Capital

The cost of borrowing money, calculated as a percentage of the initial investment.

Signup and view all the flashcards

EUAC (Equivalent Uniform Annual Cost)

A method to compare the cost of different options over their lifespan by calculating the annual equivalent cost of each option. Used to find the most economical choice.

Signup and view all the flashcards

P/F Factor

A financial factor used to determine the present value of a future amount. It considers the time value of money, meaning a dollar today is worth more than a dollar in the future.

Signup and view all the flashcards

A/P Factor

A financial factor used to calculate the annual equivalent cost of an asset over its lifespan. It converts a lump sum amount into a series of equal payments.

Signup and view all the flashcards

Minimizing Costs

The goal of replacement analysis is to find the replacement schedule that results in the lowest total cost over the entire lifespan of the asset.

Signup and view all the flashcards

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)

  • 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.

  • There are numerous problem scenarios illustrated for different situations.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

Related Documents

Module 7 Replacement Analysis PDF

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.

More Like This

Use Quizgecko on...
Browser
Open
Browser
Browser