Wize University Managerial Accounting Textbook > Incremental Analysis
Keep or Replace Equipment
Popular Courses
COMM 305
Concordia University
Managerial Accounting
University Study Guides
Managerial Accounting
University Study Guides
ACC 406
Toronto Metropolitan University
ACCTG 322
University of Alberta
ACCT 2230
University of Guelph
ADM 2341
University of Ottawa
COMMERCE 2AB3
McMaster University
ACTG 2020
York University
COMM 1102
Dalhousie University
ACC 312
The University of Texas at Austin
ACC 242
Arizona State University - Tempe
ACC 202
Michigan State University
ACIS 2116
Virginia Tech
ACG 2071
University of Central Florida
BUS1 21
San José State University
BUS-A 306
Indiana University - Bloomington
ACCT 2102
Temple University
ACCTG-202
San Diego State University
ACCTMIS 2300
Ohio State University
0:00 / 0:00
Keep or Replace Equipment
A decision on whether an existing piece of equipment should be kept for the rest of its useful life, or if it should upgraded. When upgrading equipment that can still be used, the benefit of the change must outweigh the cost of the upgrade.
Relevant Information
- Additional sales that are made possible by the new equipment
- Cost savings from new equipment
- Purchase price of new equipment
- Incremental salvage value (difference between salvage value of new equipment and old equipment)
- Current market value of old equipment (possible income if sold today)
Irrelevant Information
- Original purchase price of old equipment
- Depreciation
0:00 / 0:00
Example: Keep or Replace Equipment
Alt Hotels in Toronto installed a new elevator 2 years ago at a cost of $600,000. The elevator has an annual operating cost of $40,000 but has been breaking down more often than management expected. Since it is no longer covered under the manufacturer's warranty, the company is considering replacing it with a new model. The new elevator will cost $670,000 and will have an annual operating cost of $25,000. Both elevators could be used for another 10 years.
If Alt Hotels changes their existing elevator, the parts can be sold back to the manufacturer for $200,000. If the old elevator is kept, it will have a salvage value of $40,000 at the end of its useful life. The new elevator will have a salvage value of $100,000 at the end of its life.
Practice: Keep or Replace Equipment
ABC Inc is considering replacing a machine used in its packaging process. Its existing machine was purchased for $250,000 4 years ago and had a 10 year useful life at the time of purchase with an expected to have a salvage value of $10,000 at the end of its life. The new machine that the company is considering can be used for 6 years and is expected to have a salvage value of $30,000 at the end of its life, the cost of the machine is $400,000.
The new machine is faster and more efficient, as a result the company believes it can increase the number of units packaged and sold per year by 20%, and decrease operating expenses by $35,000 per year. If the existing machine is replaced, a salvage company has offered to buy it for parts at a price of $90,000 cash.
The company's income statement from last year:
The existing machine should be: