Question

Marigold Corp. is considering the replacement of a piece of equipment with a newer model. The following data has been collected:

	Old Equipment	New Equipment
Purchase price	$132000	$224000
Accumulated depreciation	52800	- 0 -
Annual operating costs	156000	156000

If the old equipment is replaced now, it can be sold for $36400. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. The company uses straight-line depreciation with a zero salvage value for all of its assets.

The net advantage (disadvantage) of replacing the old equipment with the new equipment is

$36400

$52800

$(82600)

$(45000)

Answer 1

As the company uses straight line depreciation with zero salvage value of asset the advantage of replacing the old equipment with the new equipment will be the amount for which the old equipment can be sold. As a company has not received any salvage value for the said the amount recognised by selling the machine is the net advantage for the company.

Therefore the net advantage of replacing the old equipment with the new equipment is $36,400

Therefore the correct option is 1st.

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