Blue Manufacturing Company is trying to decide whether to trade in equipment use

Question

Blue Manufacturing Company is trying to decide whether to trade in equipment used in its manufacturing process for a newer model. The new equipment will save money because it will be more efficient to use. Indicate if the following items are relevant or irrelevant to this decision. Item Relevant or Irrelevant The price of the new equipment The price paid for the old equipment The trade in value of the old equipment The repair costs that will be incurred if the old equipment is kept The expected cost savings of the new equipment The costs that have been incurred on the old equipment

Item

Relevant or Irrelevant

The price of the new equipment

The price paid for the old equipment

The trade in value of the old equipment

The repair costs that will be incurred if the old equipment is kept

The expected cost savings of the new equipment

The costs that have been incurred on the old equipment

Item

Relevant or Irrelevant

The price of the new equipment

The price paid for the old equipment

The trade in value of the old equipment

The repair costs that will be incurred if the old equipment is kept

The expected cost savings of the new equipment

The costs that have been incurred on the old equipment

Explanation / Answer

ITEM RELEVENT / IRRELEVENT The price of the new equipment RELEVENT, TO CALCULATE INCREMENTAL NPV The price paid for the old equipment IRRELEVENT , SUNK COST The trade in value of the old equipment RELEVENT, TO CALCULATE INCREMENTAL NPV The repair costs that will be incurred if the old equipment is kept RELEVENT, TO CALCULATE INCREMENTAL NPV The expected cost savings of the new equipment RELEVENT, TO CALCULATE INCREMENTAL NPV The costs that have been incurred on the old equipment IRRELEVENT , SUNK COST

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