Chapter 7, Problem 7.4AP

Compute gain or loss, and determine if equipment should be replaced.

(LO 5), S

Last year (2016), 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
Purchase price	$120,000	$160,000
Estimated salvage value	0	0
Estimated useful life	5 years	4 years
Depreciation method	Straight-line	Straight-line
Annual operating costs other than depreciation:
Variable	S 35.000	S 10,000
Fixed	23.000	8,500

Annual revenues are $240,000, and selling and administrative expenses are $29.000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2017, Richter Condos will be able to sell it for $25,000.

Instructions

(a) Determine any gain or loss if the old elevator is replaced.

(b) Prepare a 4-year summarized income statement for each of the following assumptions:

(1) The old elevator is retained.

(2) The old elevator is replaced.

(c) Using incremental analysis, determine if the old elevator should be replaced.

(d) Write a memo to Ron Richter explaining why any gain or loss should be ignored in the decision to replace the old elevator.

(b) (2) Nl $539,000

(c) Nl increase $23,000