Oriole Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, Oriole Roofing spent $68,400 refurbishing the lift. It has just determined that another $33,000 of repair work is required. Alternatively, it has found a newer used lift that is for sale for $139,500. The company estimates that both lifts would have useful lives of 5 years. The new lift is more efficient and thus would reduce operating expenses from $95,000 to $72,200 each year. Oriole Roofing could also rent out the new lift for about $8,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for $20,500 if the new lift is purchased. The new lift and old lift are estimated to have salvage values of zero if used for another 5 years. Prepare an incremental analysis showing whether the company should repair or replace the equipment. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Operating expenses $ Repair costs Rental revenue New machine cost Sale of old machine Total cost $ The equipment should Retain Equipment 475000 i 33000 i 508000 Should company repair or replace the equipment? be replaced. 0 0 $ Replace Equipment 361000 i 8000 139500 0 (20500) i i 488000 $ $ Net Income Increase (Decrease) 114000 33000 (8000) 170 (139500) 20500 20000
Oriole Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, Oriole Roofing spent $68,400 refurbishing the lift. It has just determined that another $33,000 of repair work is required. Alternatively, it has found a newer used lift that is for sale for $139,500. The company estimates that both lifts would have useful lives of 5 years. The new lift is more efficient and thus would reduce operating expenses from $95,000 to $72,200 each year. Oriole Roofing could also rent out the new lift for about $8,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for $20,500 if the new lift is purchased. The new lift and old lift are estimated to have salvage values of zero if used for another 5 years. Prepare an incremental analysis showing whether the company should repair or replace the equipment. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Operating expenses $ Repair costs Rental revenue New machine cost Sale of old machine Total cost $ The equipment should Retain Equipment 475000 i 33000 i 508000 Should company repair or replace the equipment? be replaced. 0 0 $ Replace Equipment 361000 i 8000 139500 0 (20500) i i 488000 $ $ Net Income Increase (Decrease) 114000 33000 (8000) 170 (139500) 20500 20000
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 20P: The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting,...
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