5. (20 pts) Consider the following data concerning the replacement of old equipm

Question

5. (20 pts) Consider the following data concerning the replacement of old equipment by new equipment Proposed New Equipment Old Equipment $32,000 $13,200 0 0 Original cost Useful life in years 8 Current age in years Useful life remaining in years Accumulated depreciation Book value Disposal value (in cash) now Annual cash operating costs (maintenance, power, repairs, lubricants, etc.) Not acquired yet. $20,000 12,000 3,600 $11,400 $6,100 Prepare a cost comparison of all relevant items for the next 3 years together. Ignore taxes? B) Prepare a cost comparison that includes both relevant and irrelevant items.? C) Prepare a comparative statement of the total charges against revenue for the first year. Would the manager be inclined to buy the new equipment?

Explanation / Answer

Answer to B

Answer to A New Machine Old Machine Annual cash operating cost $         6,100.00 $ 11,400.00 No. of Years $                 3.00 $             3.00 Total Cost of 3 years $       18,300.00 $ 34,200.00 Acquisition Cost $       13,200.00 $                 -   LESS : Disposal Value $       -3,600.00 $                 -   NET COST $       27,900.00 $ 34,200.00 Since net cost of new machine is lower than old machine it should be purchased and old one disposed off.

Answer to B

New Machine Old Machine Total Annual Cost for 3 Years $       18,300.00 $   34,200.00 Acquisition Cost $       13,200.00 $                   -   LESS : Disposal Value $        -3,600.00 $                   -   Depreciation of 3 years $       13,200.00 $   12,000.00 Above is the comparison of all relevant and irrevalnt costs

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