Equipment replacement decision depreciation. Gina Matheson <sp?> owns and operat
ID: 2382607 • Letter: E
Question
Equipment replacement decision depreciation. Gina Matheson <sp?> owns and operates a successful florist shop in Bloomington, Indiana. Two years ago, Gina purchased a refrigerated display case for $20,000 expecting to use it for 10 years. Unfortunately, Gina's assistant recently and accidentally left the case door open during the night and the motor burned out. The local repair shop has informed Gina that it will cost $4,500 in parts and labor to fix the refrigerated display case. The case needs a new motor and wiring. On the upside, if the existing case is repaired then it will last another 10 years. Rather than repair the existing display case, Gina is considering purchasing a new refrigerated display case. A new display case would cost Gina $21,000 and last 10 years. In addition, the new case has better insulation than the existing case and Gina believes that purchasing the new case will save her $100 per month in utility bills. Ignore the time value of money and all the subsequent questions. Also ignore income taxes, except where instructed otherwise.A. Should Gina repair the existing case or purchase the new case. In addition to the facts above, assume that the existing case has a book value of $16,000, but given it's current condition cannot be sold (i.e., the existing case has a current sales value of 0).
B. Assume the existing display case has a book value of $10,000 rather than $16,000. Would this information affect your answer to part A.
C. Assume the existing case has a book value of $16,000 and can be sold in it's current condition for $10,000 (rather than $0 as assumed in part A). Would this information affect your answer to part A.
D. Assume that the existing case has a book value of $16,000 and can be sold for $5,000. In addition, assume that Gina pays income taxes equal to 30% of the profit. Finally, Gina depreciates all of her assets using straight line depreciation and zero assumed salvage value. In light of this information, should Gina repair the existing case or purchase the new case.
E. What other factor should Gina likely consider in her decision regarding whether to repair or replace her existing refrigerator display case.
Explanation / Answer
New Case saving =$100 pm * 10Yr*12 month per yr = $12000 over 10 yrs So Net Cost of New Case = 21000-12000 = 9000 ...........(Z) A. Should Gina repair the existing case or purchase the new case. In addition to the facts above, assume that the existing case has a book value of $16,000, but given it's current condition cannot be sold (i.e., the existing case has a current sales value of 0). Yes. Existing case has no value & can't be sold. So it will a dead loss. Buying a new case has a Net Cash outgo of 9000. while repair of old case will cost 4500 & also give addl 2 yrs of useful life. B. Assume the existing display case has a book value of $10,000 rather than $16,000. Would this information affect your answer to part A. No. Existing case has 10000 value. But can't be sold. So it will a dead loss. Buying a new case has a Net Cash outgo of 9000 while repair of old case will cost 4500 & also give addl 2 yrs of useful life. C. Assume the existing case has a book value of $16,000 and can be sold in it's current condition for $10,000 (rather than $0 as assumed in part A). Would this information affect your answer to part A. No. If Existing case is sold for 10000, there is an implied loss of 6000 (10000-16000). Buying a new case has a Net Cash outgo of 9000. SO Total Cashflow will still be negative. D. Assume that the existing case has a book value of $16,000 and can be sold for $5,000. In addition, assume that Gina pays income taxes equal to 30% of the profit. Finally, Gina depreciates all of her assets using straight line depreciation and zero assumed salvage value. In light of this information, should Gina repair the existing case or purchase the new case. If Existing case is sold for 5000, there is an implied loss of 11000 (5000-16000). If adjusted against profit, it will save her addl 30%*11000=3300. Buying a new case has a Net Cash outgo of 9000. Ater adjusting for Loss due to Sale of 3300, Net cashflow is still negative at 5000+3300-9000 = -700. SO Total Cashflow will still be negative if a new case is bought. SO repair of old case at 4500 is better option & also give addl 2 yrs of useful life. E. What other factor should Gina likely consider in her decision regarding whether to repair or replace her existing refrigerator display case. Gina should consider if she still wants to sale flowers after 10 yrs. Also just like new case is more efficient, more such devlopments will happen during the period of life of old case. Gina should consider Time value of money, impact of Loss on her profits etc.
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