Question

Exercise 20-13 (Part Level Submission) On January 2, 2016, Twilight Hospital purchased a $92,000 special radiology scanner from Bella Inc. The scanner had a useful life of 4 years and was estimated to have no disposal value at the end of its useful life. The straight-line method of depreciation is used on this scanner. Annual operating costs with this scanner are $105,000. Approximately one year later, the hospital is approached by Dyno Technology salesperson, Jacob Cullen, who indicated that purchasing the scanner in 2016 from Bella Inc. was a mistake. He points out that Dyno has a scanner that will save Twilight Hospital $26,000 a year in operating expenses over its 3-year useful life. Jacob notes that the new scanner will cost $110,000 and has the same capabilities as the scanner purchased last year. The hospital agrees that both scanners are of equal quality. The new scanner will have no disposal value. Jacob agrees to buy the old scanner from Twilight Hospital for $37,000. Prepare an incremental analysis of Twilight Hospital. (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Retain Scanner Replace Scanner Net Income Increase (Decrease) Annual operating costs $ $ $ New scanner cost Old scanner salvage Total $ $ $ Should Twilight Hospital purchase the new scanner on January 2, 2017? YesNo

Answer 1

Calculation of Gain /(Loss) on sale of old Scanner
Depreciation per year = (Purchase Cost-Salvage Value)/Useful life
		= ($92000-0)/4 years
		$ 23,000.00
WDV as on Jan 2, 2017
	;= Purchase Price - Dep for 1st Year
	= $92000 - 23000
	69000
Loss on Sale of Old Scanner
	= WDV - Sales Price
	= 69000-37000
	$ 32,000.00
Incremental Analysis of Twilight for next 3 years
				Retain	Replace
Increase in Net Income				0	0
Increase in Annual Operating Cost [26000*3 years]				78000	0
Cost increase due to purhase of new Scanner					18000
Loss on sale of old scanner					32000
total increase incost				78000	50000
Cost due to purchase of scanner
= 110000-92000
18,000.00
So, net Saving due to replacement
	= $78000-$50000
	= $28000 in 3years