Question

Bruce and Emmett (B & E) is considering a significant equipment replacement. B & E would like to replace some of their equipment before December 31, 2019. The equipment originally cost $500,000 and the equipment’s accumulated depreciation balance at the end of 2019 is will be $450,000. At this point the equipment is depreciated to its salvage value.

Your long-term asset accountant, Boris, tells you about four equipment options as follows:

1. construct new equipment and sell the old equipment,
2. exchange the old equipment for new equipment that is more efficient,
3. purchase new equipment that is more efficient and sell the old equipment, or
4. overhaul the old equipment.

The estimated life of any new equipment is 5 years.

All loans would start as of January 1, 2019

B & E would like you to analyze the four options to determine the financial impact of each decision and any non-financial considerations that may result from each decision. Additional information about each option is presented below:

(c) Since you are now in the process of analyzing the quantitative effects of this decision, you decide to also consider whether the acquisition of any new equipment will cause any employees to lose jobs. Also you wonder if there are other non-financial and/or ethical considerations you should include in your analysis. Write a memo describing other qualitative or subjective issues that you think B & E should consider in their analysis.

Answer 1

The non financial factors to be considered by the company are :

1) Job opportunities - Constructing the new equipment in-house will provide job opportunities for various employees and will boost their morale.

2) Quality standards - Quality standards to be maintained is another non-financial factor that should be considered before making such decisions.

3) Tax Benefits - The company should consider the tax benefits it will avail from each of the above mentioned options.

4) Capacity utilization- The company should also consider the capacity of the equipment it will get in ach of the above mentioned options and compare it with it's capacity requirements.