Reference no: EM132560512

Last year (2016), Richter Condos installed a mechanized elevator for its tenants. The owner of the company, Ron Richter, recently returned from an industry equipment exhibition where he watched a computerized elevator demonstrated. He was impressed with the elevator's speed, comfort of ride, and cost efficiency. Upon returning from the exhibition, he asked his purchasing agent to collect price and operating cost data on the new elevator. In addition, he asked the company's accountant to provide him with cost data on the company's elevator. This information is presented below.

                                                     Old Elevator                                   New Elevator

Purchase price                                      $120,000                              $160,000

Estimated salvage value                                 0                                          0

Estimated useful life                                    5 years                                 4 years

Depreciation method Straight-line Straight-line

Annual operating costs

other than depreciation:

Variable                                                    $ 35,000                               $ 10,000

Fixed                                                          23,000                                     8,500

Annual revenues are $240,000, and selling and administrative expenses are $29,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2017, Richter Condos will be able to sell it for $25,000.

Instructions

Question (a) Determine any gain or loss if the old elevator is replaced.

Question (b) Prepare 4-year summarized income statement for each of the following assumptions:

(1) The old elevator is retained.

(2) The old elevator is replaced.

Question (c) Using incremental analysis, determine if the old elevator should be replaced.