Question

Problem 20-4A (Part Level Submission)

Last year (2016), Richter Condos installed a mechanized elevator for its tenants. The owner of the company, Ron Richter, recently returned from an industry equipment exhibition where he watched a computerized elevator demonstrated. He was impressed with the elevator's speed, comfort of ride, and cost efficiency. Upon returning from the exhibition, he asked his purchasing agent to collect price and operating cost data on the new elevator. In addition, he asked the company’s accountant to provide him with cost data on the company’s elevator. This information is presented below.

Old Elevator New Elevator Purchase price $104,500 $161,000

Estimated salvage value 0 0

Estimated useful life 5 years 4 years

Depreciation method Straight-line Straight-line

Annual operating costs other than depreciation:

Variable $35,600 $11,000

Fixed 23,200 9,000

Annual revenues are $239,000, and selling and administrative expenses are $29,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2017, Richter Condos will be able to sell it for $24,700.

Determine any gain or loss if the old elevator is replaced.

Answer 1

1	Working		Old	New
	Purchase price	a	$         104,500	$      161,000
	Useful life	b	$                      5	$                   4
	Depreciation	c=a/b	$           20,900	$         40,250
	Book value toaday	d=a-c	$           83,600
	Sale price today	e	$           24,700
	Loss on sale	f=e-d	$         (58,900)
2	Calculation of Initial outflow
	Purchase of New equipment	a	$         161,000
	Sale of old equipment	b	$         (24,700)
	Initial Outflow	d=a-b-c	$         136,300
3	Calculation of Change in income
			Old machine	New Machine	Change
	Annual revenue	a	$   239,000.00	$239,000.00	$                   -
	Less: Cost of good sold
	Variable cost	b	$     35,600.00	$   11,000.00	$ (24,600.00)
	Fixed cost	c	$     23,200.00	$     9,000.00	$ (14,200.00)
	Depreciation	d	$     20,900.00	$   40,250.00	$   19,350.00
	Gross Profit	e=a-b-c-d	$         159,300	$      178,750	$   19,450.00
	Less: Selling exp	f	$           29,000	$         29,000	$                   -
	Operating income	g=e-f	$         130,300	$      149,750	$   19,450.00
	Hence, there is an increase in annual income by $19,450 if old elevator is replaced
	However, there is loss on sale of old elevator as well amounting to $58,900
	Total income=(19450*4 year)	$   77,800.00
	Loss on sale	$ (58,900.00)
	Net gain	$   18,900.00

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