Question

James Thomas, the accounting supervisor of Liberty Hotel, is considering the purchase of a computer system for the back office. Two alternatives are being considered as follows: A B Cost $10,000 $12,000 Salvage value $1,000 $2,000 Expected useful life 3 years 3 years Utilities (annual) $1,000 $800 Operator labor (annual) $25,000 $25,000 Repairs (annual) $1,000 $900 Supplies (annual) $2,000 $2,000 Required: 1. Which costs are sunk? 2. Which costs are irrelevant? 3. Prepare a comparative cost analysis for the two alternatives. Ignore the time value of money and taxes. Include only relevant costs. 4. Which alternative do you recommend purchasing? Why?

Answer 1