Company is considering the replacement of equipment used in operations. The foll
ID: 2502865 • Letter: C
Question
Company is considering the replacement of equipment used in operations. The following data are
available:
Old Equipment New Equipment
Original cost $93,000 $60,000
Useful life in years 13 6
Current age in years 7 0
Book value $57,000 -
Disposal value now $50,000 -
Disposal value in 6 years 0 0
Annual cash operating costs $14,000 $11,000
Required:
A) Prepare a cost comparison for replacing the old equipment. Use only relevant items and add the items
together for the next 6 years.
B) Should the old equipment be replaced?
Explanation / Answer
A]If the equipment is not replaced:-
TOTAL COST [WITHOUT DISCOUNT RATE]= 14000*6
= 84000
IF THE EQUIPMENT IS REPLACED
TOTAL COST[WITHOUT DISCOUNT RATE]= (60000-50000) + 11000*6
= 76000
B] YES THE EQUIPMENT SHOULD BE REPLACED AS THE TOTAL COST WILL BE REDUCED.
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