Equipment Management - Lesson Summary
When the cumulative cost is at its minimum point, then the equipment has reached the end of its economic life.
All the costs associated with the machine should be considered in order to make an accurate estimation of the optimum replacement time.
The economic life of equipment refers to the time at which the cumulative cost per operating hour of owning and operating equipment is minimum.
Under the minimum cost method, the decision to replace equipment is made when the estimated annual cost of the current machine for the next year exceeds the minimum average annual cumulative cost of replacement.
Under the maximum profit method, the decision to replace equipment is made when the estimated annual profit of the defender for the next year falls below the maximum average annual cumulative profit of the challenger.
The sunk cost scenario occurs when the estimated book value of equipment calculated using the depreciation accounting method is greater than its current market value.
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