Chung Inc. is considering the replacement of a piece of equipment with a newer m

Question

Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected:

Old Equipment New Equipment

Purchase price   $225,000 $375,000

Accumulated depreciation   90,000 -0-

Annual operating costs 300,000 240,000

If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment's remaining useful life and the new equipment's useful life is 5 years. The net advantage (disadvantage) of replacing the old equipment with the new equipment is

A) $60,000

B) $(15,000)

C) $(75,000)

D) $90,000

Explanation / Answer

Old equipment New equipment Difference Purchase price 375000 -375000 Sales value -60000 60000 Annual operating costs (5 years) 1500000 1200000 300000 Total 1500000 1515000 -15000 Option B $(15,000) is correct

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