Question

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.

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.