(Asset replacement) Sandhills Energy Company provides electrical services to several rural Nebraska counties. The company’s efficiency has been greatly affected by changes in technology. Most recently, the company is considering replacement of its main steam turbine. The existing turbine was put in place in the 1970s but has become obsolete. While the system’s operation is very reliable, it is much less efficient than newer turbines that are computer controlled.

The company has gathered financial information pertaining to the new and old technologies. The following information was presented by the controller to corporate management:

a. Identify the costs that are relevant to the company’s equipment replacement decision.

b. Determine which alternative is better from a financial perspective. Provide your own computations based on relevant costs only.

c. For this part only, assume that the cost of the new technology is unknown.
What is the maximum amount that Sandhills could pay for the new technology and be no worse off financially?

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Original cost Market value now Remaining life Quarterly operating costs Salvage value in 8 years Accumulated depreciation Old Turbine $3,000,000 $400,000 8 years $120,000 $0 $1,000,000 New Turbine $2,000,000 $2,000,000 8 years $45,000 $0