Reference no: EM13554422

On January 2, 2011, Kinnaird Hospital purchased a $100,000 special radiology scanner from Rickard Inc. The scanner has a useful life of 5 years and will have no disposal value at the end of its useful life. The straight-line method of depreciation is used on this scanner. Annual operating costs with this scanner are $105,000.

Approximately one year later, the hospital is approached by Harmon Technology salesperson, Jane Black, who indicated that purchasing the scanner in 2011 from Rickard Inc. was a mistake. She points out that Harmon has a scanner that will save Kinnaird Hospital $27,000 a year in operating expenses over its 4-year useful life. She notes that the new scanner will cost $120,000 and has the same capabilities as the scanner purchased last year. The hospital agrees that both scanners are of equal quality. The new scanner will have no disposal value. Black agrees to buy the old scanner from Kinnaird Hospital for $30,000.

Instructions

(a) If Kinnaird Hospital sells its old scanner on January 2, 2012, compute the gain or loss on the sale.

(b) Using incremental analysis, determine if Kinnaird Hospital should purchase the new scanner on January 2, 2012.

(c) Explain why Kinnaird Hospital might be reluctant to purchase the new scanner, regardless of the results indicated by the incremental analysis in (b).