Reference no: EM132514619

Michael Trencher bought his current cement mixer two years ago for $4,500 and it has one more year of life remaining. He is using straight-line depreciation for the mixer. He is using straight-line depreciation for the mixer. He could purchase a new mixer for $950 but it would only last one year. Michael knows that the new mixer would save him $1,300 in annual operating expenses compared to the existing one.

Michael performed the following analysis to determine how a decision to replace the cement mixer will affect his profit:

1. Savings in annual operating expenses if old cement mixer is replaced $1,300
2. Write-off of old cement mixer's remaining book value ($4,500 / 3) = $(1,500)
3. Profit (loss) associated with replacement $(200)

• Consequently, he has decided against buying the new mixer, since doing so would result in a loss of $200 over the next year.

Question1 : Evaluate Michael's analysis and decision.

Question2 : Which step did Michael make a mistake in? Provide an explanation of the mistake.