Question

E7.13 (LO 5), E  On January 2, 2019, Twilight Hospital purchased a $100,000 special radiology scanner from Bella Inc. The scanner had a useful life of 4 years and was estimated to have no disposal value at the end of its useful life. The straight-line method of depreciation is used on this scanner. Annual operating costs with this scanner are $105,000.

Use incremental analysis for retaining or replacing equipment decision.

Approximately one year later, the hospital is approached by Dyno Technology salesperson, Jacob Cullen, who indicated that purchasing the scanner in 2019 from Bella Inc. was a mistake. He points out that Dyno has a scanner that will save Twilight Hospital $25,000 a year in operating expenses over its 3-year useful life. Jacob notes that the new scanner will cost $110,000 and has the same capabilities as the scanner purchased last year. The hospital agrees that both scanners are of equal quality. The new scanner will have no disposal value. Jacob agrees to buy the old scanner from Twilight Hospital for $50,000.

Instructions

a. If Twilight Hospital sells its old scanner on January 2, 2020, compute the gain or loss on the sale.

b. Using incremental analysis, determine if Twilight Hospital should purchase the new scanner on January 2, 2020.

c. Explain why Twilight Hospital might be reluctant to purchase the new scanner, regardless of the results indicated by the incremental analysis in (b).

Answer 1