Added to the cost of new exchanger in the economic analysis

Reference no: EM13692545

A proposal has been made to replace a large heat exchanger (3 years ago, the initial cost was $85,000) with a new, more efficient unit at a cost of $120,000. The existing heat exchanger is being depreciated by the MACRS method. Its present book value is $20,400, but it has no current value, since its scrap value just equals the cost to remove it from the plant. In preparing the before-tax economic analysis to see whether the existing heat exchanger should be replaced, the proper treatment of the $20,400 book value becomes an issue. Three possibilities are that the $20,400 book value of the heat exchanger is:

a) Added to the cost of the new exchanger in the economic analysis.

b) Subtracted from the cost of the new exchanger in the economic analysis.

c) Ignored in the before-tax economic analysis.

Which of the three possibilities is correct?

Reference no: EM13692545

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