Question

Problem 12-4 Last year (2016), Indigo Condes installed a mechanimed elevator for its tenants. The owner of the company, Ron Richter, recently returned from an industry equipment to where he watched a computerized elevator demonstrated. He was impressed with the elevator's speed, comfort of ride, and cost efficiency. Upon returning from the exhibition, he asked his purchasing agent to collect price and operating cost data on the new elevator. In addition, he asked the company's accountant to provide him with cost data on the company's elevator This information is presented below Old Elevator $96,000 Elevator $160,000 Purchase price Estimated salvage value Estimated useful life Depreciation method Annual operating costs other than depreciation: Variable . 5 years Straight-line 4 years Straight-line $34,800 22,800 $10,000 8,800 Annual revenues are $241,000, and selling and administrative expenses are $29,000, regardless of which elevator is used. If the old eleviis replaced now, at the beginning of 2017, Indigo Condos will be able to sell it for $25,600. Determine any gain or loss if the old elevator is replaced

Answer 1

(1)book value of old elevator

= cost-depreciation for year 2016

depreciation =96000-0/5

=19200$

book value =96000-19200

=76800

gain(loss)= sale price- book value

=25600-76800

=51200$ loss

four year summarized income statement

if old elevator is retained

Revenues	964000	[241000*4years]
less costs
variable costs	139200	[34800*4]
fixed costs	91200	[22800*4]
selling and administrative	29000	[29000]
depreciation	76800	[96000/5*4remainning years]
Net income	627800	[964000-139200-91200-29000-76800]

2. if olde elevator is replaced

Revenues	964000	[241000*4years]
less costs
variable costs	40000	[10000*4]
fixed costs	35200	[8800*4]
selling and administrative	29000	[29000]
depreciation	160000	[160000/4*4remainning years]
operating income	699800	[964000-40000-35200-29000-160000]
less:loss on old elevator	-51200
Net income	648600	[699800-51200]

2. incremental

	old elevator retained	replaced	income increase(decrease)
variable	139200	-40000	99200[139200-40000]
fixed	91200	-35200	56000[91200-35200]
new elevator cost	0	-160000	-160000
salavage on old elevator	0	25600	25600
total	-230400	-209600	-20800

yes elevator should be replaced as it results is lower cash outflows