Question

Rooney Company is considering the replacement of some of its manufacturing equipment. Information regarding the existing equipment and the potential replacement equipment follows.

Existing Equipment				Replacement Equipment
Cost	$	111,000		Cost	$	111,000
Operating expenses*		118,000		Operating expenses*		114,000
Salvage value		21,000		Salvage value		13,000
Market value		49,000		Useful life		5	years
Book value		33,000
Remaining useful life		5	years

^*The amounts shown for operating expenses are the cumulative total of all such expected expenses to be incurred over the useful life of the equipment.

Required
Calculate the total relevant cost of existing equipment and the potential replacement equipment. Should the equipment be replaced?

Answer 1

	Existing Equipment	Replacement Equipment
Purchase price		111000
Operating expenses	118000	114000
Salvage value	-21000	-13000
Opportunity cost-market value	49000
Total relevant costs $	146000	212000

No. The total cost of the existing equipment is lower than that of the potential replacement equipment and hence the equipment should not be replaced.