AE7-13 (a,b) On January 2, 2011, Kinnaird Hospital purchased a $99,350 special r

Question

AE7-13 (a,b)
On January 2, 2011, Kinnaird Hospital purchased a $99,350 special radiology scanner from Faital Inc. The scanner has a useful life of 5 years and will have no disposal value at the end of its useful life. The straight-line method of depreciation is used on this scanner. Annual operating costs with this scanner are $104,330.
Approximately one year later, the hospital is approached by Harmon Technology salesperson, Jane Black, who indicated that purchasing the scanner in 2011 from Faital Inc. was a mistake. She points out that Harmon has a scanner that will save Kinnaird Hospital $26,850 a year in operating expenses over its 4-year useful life. She notes that the new scanner will cost $119,900 and has the same capabilities as the scanner purchased last year. The hospital agrees that both scanners are of equal quality. The new scanner will have no disposal value. Black agrees to buy the old scanner from Kinnaird Hospital for $31,400.


If Kinnaird Hospital sells its old scanner on January 2, 2012, compute the gain or loss on the sale. (Enter the answer as a positive number and indicate profit or loss.)

$ _________ and Loss or Gain?

Using incremental analysis, determine if Kinnaird Hospital should purchase the new scanner on January 2, 2012. (If answer is zero, please enter 0. Do not leave any fields blank. If amount decreases the income, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Enter cost amounts as positive in the columns "Retain Scanner" and "Replace Scanner". To enter salvage value amount in columns "Retain Scanner" and "Replace Scanner" use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Retain Scanner Replace Scanner Net Income
Increase (Decrease)
Annual operating costs $ $ $
New scanner cost
Old scanner salvage
Total $ $ $

Kinnaird Hospital should _____ the old scanner. Retain or Replace?

Explanation / Answer

AE7-13 (a,b)
On January 2, 2011, Kinnaird Hospital purchased a $99,350 special radiology scanner from Faital Inc. The scanner has a useful life of 5 years and will have no disposal value at the end of its useful life. The straight-line method of depreciation is used on this scanner. Annual operating costs with this scanner are $104,330.
Approximately one year later, the hospital is approached by Harmon Technology salesperson, Jane Black, who indicated that purchasing the scanner in 2011 from Faital Inc. was a mistake. She points out that Harmon has a scanner that will save Kinnaird Hospital $26,850 a year in operating expenses over its 4-year useful life. She notes that the new scanner will cost $119,900 and has the same capabilities as the scanner purchased last year. The hospital agrees that both scanners are of equal quality. The new scanner will have no disposal value. Black agrees to buy the old scanner from Kinnaird Hospital for $31,400.


If Kinnaird Hospital sells its old scanner on January 2, 2012, compute the gain or loss on the sale. (Enter the answer as a positive number and indicate profit or loss.)

- $99,350 for the scanner

- $104,330 for one year in operation

- $119,900

+ $31,400

$ 93,480 and Loss or Gain?

Using incremental analysis, determine if Kinnaird Hospital should purchase the new scanner on January 2, 2012.

(If answer is zero, please enter 0. Do not leave any fields blank. If amount decreases the income, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Enter cost amounts as positive in the columns "Retain Scanner" and "Replace Scanner". To enter salvage value amount in columns "Retain Scanner" and "Replace Scanner" use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

I'm not sure how to fill in the chart below on Cramster, but the basic question is "Do we replace this scanner?" The only way to answer this is to see if the savings of $26,850 per year for four years are greater than the loss of ($119,900 - $99,350 + $31,400) = $51, 950

The question is thus: is $51, 950 greater or less than ($26, 850 x 4) = $107,400

Our savings are thus greater than our losses and we should purchase the scanner because it saves us money. We should replace the old scanner.

Retain Scanner Replace Scanner Net Income
Increase (Decrease)
Annual operating costs $104,330
New scanner cost $119,900
Old scanner salvage 31,400
Total $ $ $

Kinnaird Hospital should replace the old scanner. Retain or Replace?

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