Keller Co. paid $50,000, in cash, for a piece of equipment four years ago. At th

Question

Keller Co. paid $50,000, in cash, for a piece of equipment four years ago. At the beginning of the year, the company spent $5,000 to update the equipment with the latest technology. The company no longer uses this equipment in their current operations and has received an offer of $75,000 from a firm who would like to purchase it. Keller Co. is debating whether to sell the equipment or to expand their operations such that the equipment can be used. When evaluating the expansion option, what value, if any, should Keller Co. assign to this equipment as an initial cost of the project?

Explanation / Answer

After purchasing the asset for cash @ $50,000, the asset was updated at $5,000 => Total cost at the beginning of 1st year = $50,000 + $5,000 = $55,000

At the beginning of 2nd year, total cost = $55,000 + $5,000 = $60,000

Similarly, at the beginning of 3rd year, total cost = $60,000 + $5,000 = $65,000

Similarly, at the beginning of 4th year and 5th year, total cost = $70,000 and $75,0000 respectively

So, when evaluating the expansion option, Keller Co. should assign the following as initial cost of the project:

= Cost at the end of 4th year or beginning of 5th year = $50,000 + 5000*5 = $75,000

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