Sheffield Corp. is considering the replacement of a piece of equipment with a newer model. The...

Sheffield Corp. is considering the replacement of a piece of equipment with a newer model. The following data has been collected:

	Old Equipment	New Equipment
Purchase price	$215000	$352000
Accumulated depreciation	86000	- 0 -
Annual operating costs	283000	223000

If the old equipment is replaced now, it can be sold for $58000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years.

Which of the following amounts is irrelevant to the replacement decision?

$129000

$294000

$352000

$58000

Solutions

Expert Solution

Correct option is"A" -129000

1)Replacement value of old equipment amounting to $ 58000 is a relevant value as it is an incremental cash inflow when a new equipment is purchased.

2)Purchase cost of new equipment is a relevant cost as it is an incremental cash outflow

3)Annual operating cost is a relevant cost as it is incremental cost.

4)Book value of old equipment =Cost-accumulated depreciation

= 215000- 86000

= 129000

It is irrelevant to decision making as it is a sunk cost incurred in past and does not result in any incremental cash inflow/outflow

ekkarill92 answered 1 year ago

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