Question

A. You have a car that needs $1,000 worth of repairs. Let us know what year, make, and model you choose to currently own. Your other option is to buy a new or another used car. Consider cost, fuel, etc. in your decision-making to see which alternative you might choose. What other non-financial factors would be considered?

B. Your refrigerator needs repairs of $500 and is six years old. Or you can purchase a new refrigerator. Research costs and saving in electricity to determine which option you should choose. What other non-financial factors would be considered?

I know these questions are kind of opinionated, but being advanced in accounting what would you choose and what factors do you consider?

Answer 1

A. Financial Factors:

The financial factors to be considered are:

• The purchase price of the new car reduced by the salvage or resale value of the existing car, which will be the net cash outflow.
• Equivalent Annual Cost of the new car which will include all costs of owning the car, such as maintenance costs, repair costs, fuel costs, depreciation charges estimated to be incurred during the useful life of the asset.
• Tax benefits if new car is purchased. Since, on purchase of the new car, the depreciation and operating expenses of such car will be high and if put to use for business purposes, the same can be claimed as deduction which reduces the net profits and thereby the taxes paid thereon.

Taking the above factors into consideration, the purchase of new car is suggested provided there are adequate cash flows and there is an immediate need to purchase the same.

Non Financial Factors:

The non financial factors to be considered are:

• Whether the repairs will enhance the working condition of the car or is it just to retain the existing working condition.
• The number of years the car can be used after such repair vs the number of years a newly purchased car would be put to use.
• The mileage of the used car vs the mileage of the new car.
• Repair cost of the used car in the upcoming years vs the maintenance costs if new car is purchased.
• Salvage value of the used car at present before the repair costs are incurred, compared with the salvage value of the car after the repair costs are incurred and the expected salvage value at the end of the period for which the old car can be utilised after such repairs.

B. Financial Factors:

• In Electric and Electronic applications, the electricity consumption charges increases with the usage and life of the asset. In simple words, considering the same capacity refrigerator, a six years old one would consume more electricity while compared to a brand new one.
• Similar to electricity consumption is the repairs / maintenance costs of such applications. It increases with the age and usage of the item.
• The efficiency and effectiveness of the refrigerator's cooling also reduces with usage.

Based on research costs and savings in electricity, it is preferred to purchase a new refrigerator.

Non Financial Factors:

• Whether the repairs will enhance the working condition of the refrigerator or is it incurred to retain the existing working condition.
• The number of years the refrigerator can be used after such repair vs the number of years a newly purchased refrigerator would be put to use.
• The cooling of the 6 years old refrigerator vs the cooling and other additional features of a new refrigerator.
• Repair costs and electricity charges of the used refrigerator in the upcoming years vs the maintenance and electricity costs if new refrigerator is purchased.
• Whether the user needs are fulfilled by the existing refrigerator or is new additional features are the user requirements.