Question

Yellowstore Consulting is considering replacing its phone system. The existing system cost $100.000 many years ago and has a book value of $15.00 Annual acounting depreciation is $5,000. The system is expected to last 3 more years and have no value at that point. Yellowstone believes that a new system would increase their contribution margin by $14,000 per year for the next three years. Yellowstone can lease new system for 516,000 per year. If they lease the new system, they will sell the old machine now for $12.000. Regardless of the choice of phone system, each system will have annual maintenance costs of $2.500. is the incremental contribution margin that comes with leasing the new machine relevant for making the decision to keep the old phone system or lease a new system? Yes No

Answer 1

Answer : Yes

Particulars	Amount ($)
Lease Option
Sale Proceeds of Old machine	$      12,000
Add: Incremental Margin (14000*3)	$      42,000
	$      54,000
Lease Payments (16000*3)	$      48,000
Maintainance Costs (2500*3)	$         7,500
Total Cost under Lease Option	$         1,500
(7500+48000 - 54000)
Existing Option
Total Depreciation	$      15,000
Maintainance Costs (2500*3)	$         7,500
Total Cost under Existing Machine	$      22,500