Question

Relevant Costs for Equipment Replacement Decision
Health Scan, Inc. paid $50,000 for X-ray equipment four years ago. The equipment was expected to have a useful life of 10 years from the date of acquisition with annual operating costs of $45,000. Technological advances have made the machine purchased four years ago obsolete with a zero salvage value. An improved X-ray device incorporating the new technology is available at an initial cost of $92,000 and annual operating costs of $28,000. The new machine is expected to last only six years before it, too, is obsolete. Asked to analyze the financial aspects of replacing the obsolete but still functional machine, Health Scan's accountant prepared the following analysis. After looking over these numbers, the Center's manager rejected the proposal.

Six-year savings [($45,000 − $28,000) × 6]	$102,000
Cost of new machine	(92,000)
Undepreciated cost of old machine	(30,000)
Advantage (disadvantage) of replacement	$(20,000)

Calculate the net benefit (cost) of purchasing the new machine.

Answer 1

In the given question we have to calculate net benefit of purchasing the new machine

= six year savings- cost of new machine

= 102000 - 92000

= $ 10000

Thus the net benefit of purchasing = $ 10000

Explanation

Undepreciated cost of old machine is sunk cost, so it will not be considered while calculating net benefit.