Question

# Sandhill Roofing is faced with a decision. The company relies very heavily on the use of...

Sandhill Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, Sandhill Roofing spent \$71,400 refurbishing the lift. It has just determined that another \$37,000 of repair work is required. Alternatively, it has found a newer used lift that is for sale for \$156,500. 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 \$23,800 per year. Sandhill Roofing could also rent out the new lift for about \$9,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for \$23,000 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

shouldshould not

be replaced.

#### Homework Answers

Answer #1

Ans:

 Particulars Retain Equipment Replace Equipment Net Income Increase[ Decrease] Operating Expenses [23,800*6]= 142,800 142,800 Repair Costs 37,000 37,000 Rental Revenue (54,000) 54,000 New Machine Cost 156,500 (156,500) Sale of old machine (23,000) 23,000 Total Costs 179,800 79,500 100,300

Note: The Analysis shows if purchased new Equipment will have net income of \$100,300 in period of 6 Years and by this way company should replace the Equipment.

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