Reference no: EM132803087
Question - Moe's Tavern purchased a new keg refrigeration system a few months ago using traditional coolant gas system (e.g., freon). Lenny and Carl, patrons of Moe's and employees at a local plant, told Moe about a new refrigeration system using a new technology called Cold Fusion.
Moe then went on to research a cold fusion refrigeration system to compare whether it made sense to upgrade so soon after updating his existing refrigeration system. Here is information related to the two systems.
Old System New System
Acquisition Cost $300,000 $360,000
Remaining Useful Life 4 years 4 years
Resale Value (if sold now) $100,000 $0
Salvage Value at end of 4 years $4,000 $6,000
Annual operating costs* $140,000 $80,000
*excluding depreciation & skunking costs
Additional Information:
-Moe uses straight-line depreciation.
-The new system would reduce skunking rates from 5% to 2.5%. Skunked kegs caused by the refrigeration system cost Moe $5 a keg. Moe's Tavern averages approximately 100,000 kegs annually.
-What are the net incremental costs of maintaining the old and the net incremental costs of switching to the new system for the next four years?