Question

A truck, costing $27,000 and uninsured, was wrecked the very first day it was used. It can either be disposed for $5,000 cash and replaced with a similar truck costing $30,000, or it can be rebuilt for $16,000 and be brand new as far as operating characteristics and looks are concerned. The preferred decision alternative provides a net cost savings of:

Multiple Choice

$9,000.

$12,000.

$14,000.

$19,000.

Some amount other than these choices.

Answer 1

Answer

--Correct Answer = Option #1: $ 9000

>Cost already incurred = $ 27000

>If truck is disposed off, net cost = $ 30000 replacement cost - $ 5000 sale value = $ 25000
>If truck is rebuilt, net cost = $ 16,000

>Hence, rebuilding the truck for $ 16,000 will lead to net cost saving of $ 9000 if new truck is not purchased. [$ 25000 - 16000 = 9000]