Question

A company is deciding on whether to replace some old equipment with new equipment. Which of...

A company is deciding on whether to replace some old equipment with new equipment. Which of the following is not a relevant cost for incremental analysis?

Annual operating cost of the new equipment.
Cost of the new equipment.
Accumulated depreciation on the old equipment.
Annual operating cost of the old equipment.
Business   Accounting   
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Answer #1

The Not relevant cost for incremental analysis from above is:

Accumulated depreciation on Old Equipment: This cost is not a cash flow, and also this cost do not have any bearing while making decision so its not relevant for Company to decide upon to replace some old equipment with new One.

The relevant Costs are :

1. Annual Operating Cost of the New equipment: It is relevant because Company is required to know about this as it has to incur it on recurring basis.

2. Cost of new equipment: It is relevant to know as Company has to arrange funds to purchase it.

3. Annual Operating Cost of Old Equipment: It is relevant as we need to compare the recurring Cost of new equipment with Old one and manage cash flows for the company & check profit/loss impact due to the same.

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