Question
In: Accounting
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 agoRelated Solutions
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