Question

Darcy Roofing is faced with a decision. The company relies ve ry heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, Darcy Roofing spent $78,600 refurbishing the lift. It has just determined that another $47,000 of repair work is required. Alternatively, it has found a newer used lift that is for sale for $200,500. The company estimates that both lifts would have useful lives of 6 years. The new lift is more efficient and thus would reduce operating expenses by about $26,200 per year. Darcy Roofing could also rent out the new lift for about $12,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for $29,500 if the new lift is purchased. 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).) Retain Equipment Replace Equipment Net Income Increase (Decrease) Operating expenses $ $ $ Repair costs Rental revenue New machine cost Sale of old machine Total cost $ $ $ Should company repair or replace the equipment? The equipment be replaced.

Answer 1

Answer:
	Retain Equipment	Replace Equipment	Net income Increase (Decrease)
Operating expenses	$ 157,200 ( $ 26,200 x 6 Years )	$ 0	$ 157,200
Repair costs	$ 47,000	$ 0	$ 47,000
Rental revenue	$ 0	($ 72,000) ( $ 12,000 x 6 Years)	$ 72,000
New machine cost	$ 0	$ 200,500	($ 200,500)
Sale of old machine	$ 0	($ 29,500)	$ 29,500
Total Cost	$ 204,200	$ 99,000	$ 105,200
The equipment should be replaced