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CMA Intermediate · Operations Management and Strategic Management · Economics of Maintenance and Spares Management

In a replacement analysis without time value of money, a machine should be replaced when:

A machine should be replaced when the next year's running or maintenance cost exceeds the lowest average annual total cost so far. Until then keeping it lowers the average, so continuing is economical; book value and past depreciation do not matter.

  1. AThe next year's running cost exceeds the lowest average annual cost to dateCorrect
  2. BThe machine's book value becomes zero
  3. CThe purchase price of a new machine falls
  4. DThe current year's maintenance cost is below the average cost to date

Explanation

The rule is to keep the machine while next year's running cost is below the average annual total cost so far, and replace once next year's cost exceeds that average. Book value is irrelevant, and a maintenance cost below the average means continuing is cheaper.

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