Question

McCoy Company, a Texas-based corporation, paid $120,000 to purchase an air conditioner on January 1, 20007. During 2017, surging energy costs promted management to consider replacing the air conditioner with a more energy efficient model. The new air conditioner would cost $150,000. Electricity for the existing air conditioner costs the company $60,000 per year; the new model would cost only $40,000 per year. The new model, which has an expected useful life of 10 years, would be installed on January 1, 2018. Because the old air conditioner is more durable, McCoy estimates it still has a remaining useful life of 10 years even tough it has been used. The current market value of the old air conditioner is $54,000. The expected salvage value of both air conditioners is zero. Based on this information, recommend whether to replace the equipment. Support your recommendation with appropriate computations.

Answer 1

Solution:

Differntial Analysis - Mccoy Company
Particulars	Keep Old Aircondition (Alt 1)	Replace with new Air condition (Alt 2)	Net Income Increase (Decrease)
Electricity cost during entire life	$600,000.00	$400,000.00	$200,000.00
Purchase cost less salavage value of old AC	$0.00	$96,000.00	-$96,000.00
Total Cost	$600,000.00	$496,000.00	$104,000.00

As there is net increase in income by $104,000 on replacment of equipment, therefore equipment should be replaced.