Question

On January 2, 2016, Able Hospital purchased a $100,000 special radiology scanner from Xray Inc. The scanner has a useful life of 5 years and will 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 $120,000. Approximately one year later, the hospital is approached by New Technology salesperson Shauna Larsen, who indicated that purchasing the scanner in 2016 from Xray Inc. was a mistake.

She points out that New has a scanner that will save Able Hospital $25,000 a year in operating expenses over its 4-year useful life. She notes that the new scanner will cost $115,000 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. Larsen agrees to buy the old scanner from Able Hospital for $30,000.

Instructions

(a) If Able Hospital sells its old scanner on January 2, 2017, compute the gain or loss on the sale.

(b) Using incremental analysis, determine if Able Hospital should purchase the new scanner on January 2, 2017.

(c) Explain why Able Hospital might be reluctant to purchase the new scanner, regardless of the results indicated by the incremental analysis in (b).

Answer 1

(a) we will first depreciate the old scanner and find its current book value

straight line depreciation = cost- salvage/ useful ife

=$100,000-$0 /5

=$20,000

book value = cost- depreciation

=$100,000-$20,000

Book value is $80,000 as on January 2017

gain(Loss)= sale value- book value

=$30,000-$80,000

=$50,000 loss

(b) incremental analysis

	retain scanner	replace scanner	Net increase(decrease) in income
Annual operating costs	($4,80,000)[120000*4years]	($380,000) [120000-25000saved]*4	$100,000[25000saved*4years]
New scanner costs		($100,000)	($100,000)
old scanner salvage		$30,000	$30,000
Total	($480,000)	($450,000)	$30,000

yes ,Able Hospital should purchase the new scanner on January 2, 2017. as there is increase in net income by $30,000

3.Able Hospital might be reluctant to purchase the new scanner, regardless of the results indicated by the incremental analysis in (b).

1) if the old scanner is incurring more cost , why Shauna Larsen is interested in buying the old scanner? The decision of the new salesperson cannot be trusted and team discussion is required

2) also the time value of money has been ignored. The cost saved in coming four years will have lower value as of today as the benefit is in future.