SHOJ Enterprises has asked you to look at the following data. The interest rate
ID: 1232266 • Letter: S
Question
SHOJ Enterprises has asked you to look at the following data. The interest rate is 10%.Year 1 => Marginal cost of defender = $3000, EUAC of challenger = $4500
Year 2 => Marginal cost of defender = $3150, EUAC of challenger = $4000
Year 3 => Marginal cost of defender = $3400, EUAC of challenger = $3300
Year 4 => Marginal cost of defender = $3800, EUAC of challenger = $4100
Year 5 => Marginal cost of defender = $4250, EUAC of challenger = $4400
Year 6 => Marginal cost of defender = $4950, EUAC of challenger = $6000
a) What is the defender's lowest EUAC?
b) What is the challenger's economic life?
c)When, if at all, should we replace the defender with the challenger?
Explanation / Answer
a) What is the defender's lowest EUAC?
It is 3,000, so it has an economic life of 1 year
b) What is the challenger's economic life?
The economic life is 3 years, with a EUAC of 3,300.
c)When, if at all, should we replace the defender with the challenger?
If this is the only challenger, we should replace the defender by the end of year two. And then keep the challenger for only 3 years and replace.
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