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Discussion

Comparing the marginal cost approach with the full annual cost comparison, the marginal approach

  • A.gives a different answer whenever the asset has salvage value
  • B.requires the defender's book value to be known
  • C.is quicker but assumes a steadily rising marginal cost
  • D.is slower but makes no assumption about the cost pattern

Answer: C

Testing one more year at a time is far less work and gives the right answer when the marginal cost rises monotonically. Where it does not, the defender's own economic life must be found and its annual cost compared directly.

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