Replacement Analysis Questions and Answers

Answer: A

Correct answer: both the assertion and the reason are true and the reason explains the assertion

Both are true and the reason gives the mechanism. Keeping the asset means declining the cash a sale would produce, and forgoing money one could have is economically the same as spending it. Treating the market value as the defender’s investment is what makes the comparison with the challenger a fair one.

Answer: B

Some service is indeed left unused, but rising operating costs may well make that last stretch far dearer than a new asset would be over the same period. The economic service life is generally well short of the physical one.

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.

Answer: D

Correct answer: the market value forgone by not selling

Only the forgone market value is a cost of retaining the asset, being money the business could have had and chose not to take. Past depreciation, the original invoice price and interest already paid are all sunk - unaffected by the decision and therefore excluded from both sides of it.