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Replacement Analysis

Description: This quiz is designed to assess your understanding of the concepts and techniques involved in replacement analysis, a critical decision-making process in engineering economics.
Number of Questions: 14
Created by:
Tags: engineering economics replacement analysis capital budgeting equipment evaluation
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Which of the following is NOT a primary objective of replacement analysis?

  1. Minimizing total cost

  2. Maximizing productivity

  3. Increasing safety

  4. Improving employee morale

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Correct Option: D
Explanation:

Replacement analysis primarily focuses on economic factors such as cost minimization, productivity maximization, and safety enhancement. Employee morale is not a direct objective of this analysis.

In replacement analysis, the defender is:

  1. The existing asset being evaluated for replacement

  2. The proposed new asset being considered as a replacement

  3. The asset that is ultimately selected for replacement

  4. The asset that is retained and not replaced

Show answer
Correct Option: A
Explanation:

The defender is the existing asset that is being evaluated for replacement. The challenger is the proposed new asset being considered as a replacement.

Which of the following is NOT a relevant factor to consider in replacement analysis?

  1. Initial cost of the new asset

  2. Salvage value of the old asset

  3. Operating and maintenance costs of the new asset

  4. Tax implications of the replacement

Show answer
Correct Option: D
Explanation:

Tax implications are generally not considered in replacement analysis as they are not directly related to the economic evaluation of the replacement decision.

The equivalent annual cost (EAC) of an asset is:

  1. The annual cost of owning and operating the asset

  2. The annualized initial cost of the asset

  3. The annualized salvage value of the asset

  4. The annualized operating and maintenance cost of the asset

Show answer
Correct Option: A
Explanation:

The EAC is the annual cost of owning and operating the asset, which includes the annualized initial cost, annualized salvage value, and annualized operating and maintenance cost.

Which of the following methods is used to compare the EACs of different replacement alternatives?

  1. Net present value (NPV) analysis

  2. Internal rate of return (IRR) analysis

  3. Payback period analysis

  4. Profitability index (PI) analysis

Show answer
Correct Option: A
Explanation:

NPV analysis is commonly used to compare the EACs of different replacement alternatives by calculating the present value of all future cash flows associated with each alternative and selecting the one with the highest NPV.

The challenger in replacement analysis is:

  1. The existing asset being evaluated for replacement

  2. The proposed new asset being considered as a replacement

  3. The asset that is ultimately selected for replacement

  4. The asset that is retained and not replaced

Show answer
Correct Option: B
Explanation:

The challenger is the proposed new asset being considered as a replacement. The defender is the existing asset being evaluated for replacement.

Which of the following is NOT a type of replacement analysis?

  1. Simple replacement analysis

  2. Replacement with increased capacity

  3. Replacement with decreased capacity

  4. Replacement with improved technology

Show answer
Correct Option: D
Explanation:

Replacement with improved technology is not a type of replacement analysis. It is a type of capital budgeting analysis.

In replacement analysis, the sunk cost is:

  1. The initial cost of the existing asset

  2. The salvage value of the existing asset

  3. The operating and maintenance costs of the existing asset

  4. The tax implications of the replacement

Show answer
Correct Option: A
Explanation:

The sunk cost is the initial cost of the existing asset, which has already been incurred and cannot be recovered.

Which of the following is NOT a relevant factor to consider in replacement analysis when comparing alternatives with different capacities?

  1. Production capacity

  2. Operating and maintenance costs

  3. Initial cost

  4. Salvage value

Show answer
Correct Option: D
Explanation:

Salvage value is not a relevant factor to consider when comparing alternatives with different capacities, as it is the value of the asset at the end of its useful life, which is not affected by the capacity of the asset.

The payback period of an asset is:

  1. The time it takes to recover the initial cost of the asset

  2. The time it takes to recover the total cost of the asset

  3. The time it takes to recover the operating and maintenance cost of the asset

  4. The time it takes to recover the salvage value of the asset

Show answer
Correct Option: A
Explanation:

The payback period is the time it takes to recover the initial cost of the asset from its net cash flows.

Which of the following is NOT a relevant factor to consider in replacement analysis when comparing alternatives with different technologies?

  1. Technological advancements

  2. Operating and maintenance costs

  3. Initial cost

  4. Salvage value

Show answer
Correct Option: D
Explanation:

Salvage value is not a relevant factor to consider when comparing alternatives with different technologies, as it is the value of the asset at the end of its useful life, which is not affected by the technology of the asset.

The profitability index (PI) of an asset is:

  1. The ratio of the present value of all future cash flows to the initial cost of the asset

  2. The ratio of the annual net income to the initial cost of the asset

  3. The ratio of the salvage value of the asset to the initial cost of the asset

  4. The ratio of the operating and maintenance cost of the asset to the initial cost of the asset

Show answer
Correct Option: A
Explanation:

The PI is the ratio of the present value of all future cash flows to the initial cost of the asset.

Which of the following is NOT a relevant factor to consider in replacement analysis when comparing alternatives with different lives?

  1. Useful life

  2. Operating and maintenance costs

  3. Initial cost

  4. Salvage value

Show answer
Correct Option: D
Explanation:

Salvage value is not a relevant factor to consider when comparing alternatives with different lives, as it is the value of the asset at the end of its useful life, which is not affected by the life of the asset.

The internal rate of return (IRR) of an asset is:

  1. The discount rate that makes the NPV of the asset equal to zero

  2. The discount rate that makes the EAC of the asset equal to zero

  3. The discount rate that makes the PI of the asset equal to one

  4. The discount rate that makes the payback period of the asset equal to zero

Show answer
Correct Option: A
Explanation:

The IRR is the discount rate that makes the NPV of the asset equal to zero.

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