A company wants to determine the optimal replacement policy for its equipment. New equipmentcosts $10,000. The company does not keep their equipment longer than 2 years and hasestimated the annual operating costs and trade-in values for equipment during each of the 2 yearsas:Age in years0 to 11 to 2Operating Cost$5,000$7,000Trade-in Value$8,000$6,000What is the net replacement cost at year 3 if the company used the equipment for two years fromyear 1?c. $11,000d. $9,000a. $16,000b. $14,000

Net replacement cost refers to the net cost that a company incurs at the time of replacing an…

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What is the net replacement cost at year 3 if the company used the equipment for two years from year 1?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

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ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

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Question

A company wants to determine the optimal replacement policy for its equipment. New equipment
costs $10,000. The company does not keep their equipment longer than 2 years and has
estimated the annual operating costs and trade-in values for equipment during each of the 2 years
as:
Age in years
0 to 1
1 to 2
Operating Cost
$5,000
$7,000
Trade-in Value
$8,000
$6,000
What is the net replacement cost at year 3 if the company used the equipment for two years from
year 1?
c. $11,000
d. $9,000
a. $16,000
b. $14,000

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