Question

Bob the Builder is deciding whether to replace an old construction crane with a new one. Bob’s old crane originally cost $300,000 and has $270,000 of accumulated depreciation. If Bob keeps the old crane, operating costs will be $84,000 per year for its remaining useful life of 8 years. If Bob replaces the old crane, he has an equipment broker who can sell it for $40,000 less an 8% brokerage commission. A new construction crane will cost $296,000 and have a useful life of 8 years. Annual operating costs for the new crane will be $52,000. Prepare a differential analysis that shows whether Bob should keep the old crane or replace it with the new crane.

Answer 1

Differential Analysis Keep (or) Replace
	Keep the Old Crane (A)	Replace the Old Crane (B)	Differential Effect (A (-) B)
Purchase price	$ 0	$ 296,000	($ 296,000)
Operating costs	$ 672,000 ( $ 84,000 x 8 Years)	$ 416,000 ( $ 52,000 x 8 Years )	$ 256,000
Proceed from sale	$ 0	($ 36,800) ( $ 40,000 (-) 8% )	$ 36,800
Income (Loss)	$ 672,000	$ 675,200	($ 3,200)
Since Net there is a decrease in Net inCome, Bob should keep the old crane