Question

Joness Industries 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	$150,000	$150,000
Accumulated depreciation	$100,000	$0
Annual operating costs	$70,000	$45,000

If the old equipment is replaced now it can be sold for $15,000. Both the old equipment's remaining useful life and the new equipment's useful life is 5 years. The company uses straight-line depreciation with a zero salvage value for all of its assets. What is the net increase or decrease in the cost of replacing the old equipment with the new equipment? Show and explain your calculations.

Answer 1

Calculation net increase or decrease in the cost of replacing the old equipment with the new equipment
a	Cost of new equipment	$         1,50,000
b	Less: Sale value of old equipment	$           -15,000
c	The net cost of new equipment	$         1,35,000
d	The annual saving in operating cost ($70000-45000)	$             25,000
e	total saving in operating cost (d*5 years)	$         1,25,000
f	Net Decrease in Operating Income (c-e)	$             10,000
g	Annual Decrease in operating income (f/5)	$               2,000