Page 142 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chapter 11

Replacement decisions

There are two distinct types of decisions to consider: considering
mutually-exclusive options with unequal lives, and calculating an
optimum replacement cycle.

4.1 Mutually exclusive options with unequal lives

 Companies considering the replacement of an asset may be faced with
alternatives where the life spans of the various machines differ, but the asset is
required for the foreseeable future.

 The options must be evaluated over a comparable number of years.

PV of costs
Equivalent Annual Cost = –––––––––––––––––––
Annuity factor for year n

Illustrations and further practice

Now attempt example 9 ‘Donald Ltd’ from Chapter 11.

136