Question

Last year (2017), Maginnis Condos installed a mechanized elevator for its tenants.
The owner of the company, Mitch Maginnis, 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 (years)	5	4
Depreciation method	Straight line	Straight line
Annual operating costs other than depreciation
Variable	$35,000	$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 2018, Maginnis Condos will be able to sell it for $25,000.

Required

(a) Should the old elevator should be replaced? You must justify your answer.

Answer 1

	0	1	2	3	4
revenues		$2,40,000	240000	240000	240000
variable operating costs		$10,000	$10,000	$10,000	$10,000
Fixed operating costs		$31,500	$31,500	$31,500	$31,500
Selling and admin		$29,000	$29,000	$29,000	$29,000
Depreciation		$40,000	$40,000	$40,000	$40,000
Operating cash flows		$1,29,500	$1,29,500	$1,29,500	$1,29,500
Initial investment	-$1,35,000
Net cash flows	-$1,35,000	$1,29,500	$1,29,500	$1,29,500	$1,29,500

Yes, the old elevator should be replaced as the operating cash flows are positive for all the years.