Relevant Costs for Equipment Replacement Decision (LO1, 2, 3)

Health Scan, Inc., paid $50,000 for X-ray equipment four years ago. The equipment was expected to have a useful life of 10 years from the date of acquisition with annual operating costs of $40,000.

Technological advances have made the machine purchased four years ago obsolete with a zero salvage value. An improved X-ray device incorporating the new technology is available at an initial cost of

$55,000 and annual operating costs of $26,000. The new machine is expected to last only six years before it, too, is obsolete. Asked to analyze the financial aspects of replacing the obsolete but still functional machine, Health Scan’s accountant prepared the following analysis. After looking over these numbers, the company’s manager tejected the proposal.

Six-year savings [($40,000 — $26,000) x 6] ..... $84,000 COSHOMMEWAMACMING nc cs . cts = este micpere enenemnee (55,000)

Undepreciated cost of old machine............ (30,000)

Advantage (disadvantage) of replacement....... $ (1,000)

Required Perform an analysis of relevant costs to determine whether the manager made the correct decision.