Question

At the beginning of last year (2019), Richter Condos installed a mechanized elevator for its tenants. The owner of the company, Ron Richter, recently returned from an industry equipment exhibition 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 New Elevator $100,000 $160,000 5 years Straight-line 4 years Straight-line Purchase price Estimated salvage value Estimated useful life Depreciation method Annual operating costs other than depreciation: Variable Fixed $35,300 22,800 $10,000 8.800 Annual revenues are $241,000, and selling and administrative expenses are $28,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2020, Richter Condos will be able to sell it for $24.400,

Answer 1

Part 1

Purchase price	$     100,000
Less: Depreciation expense for the year 2016 ((100000-0)/5)	$        20,000
Book value of old Elevator	$        80,000
Book value of old Elevator	$        80,000
Less: Sold of old Elevator	$        24,400
Loss on Sales of old Elevator	$        55,600

Part 2

		Retained old Elevator
Revenue (241000*4)		$        964,000
Less: Costs
Variable Costs (35300*4)	$        141,200
Fixed Costs (22800*4)	$          91,200
Selling and Administrative (28000*4)	$        112,000
Depreciation (20000*4)	$          80,000	$        424,400
Net Income		$        539,600
		Replace old Elevator
Revenue (241000*4)		$        964,000
Less: Costs
Variable Costs (10000*4)	$          40,000
Fixed Costs (8800*4)	$          35,200
Selling and Administrative (28000*4)	$        112,000
Depreciation	$        160,000	$        347,200
Operating income		$        616,800
Less: Loss on old elevator		$          55,600
Net Income		$        561,200

Part 3

	Retained old Elevator	Replace old Elevator	Net Income Increase (decrease)
Variable Operating Costs	$        141,200	$          40,000	$       101,200
Fixed Operating Costs	$          91,200	$          35,200	$         56,000
New Elevator Cost		$        160,000	$    (160,000)
Salvage on old Elevator		$        (24,400)	$         24,400
Totals	$        232,400	$        210,800	$         21,600

Part 4

Any gain or loss on should not be part of the decision of replacement of machine because it is calculated based on book value and book value is calculated using the accumulated depreciation. Thus, accumulated depreciation is calculated using depreciation expense. Depreciation is a sunk cost or past cost. therefore, gain or loss is not considered for decision making.

only incremental cash inflow and incremental cash outflow should be considered for the decision of replacing the machine.