Question
Jack Black is manager of the engineering development division of Tao Inc. Black has just received a proposal signed by all 25 of his engineers
Jack Black is manager of the engineering development division of Tao Inc. Black has just received a proposal signed by all 25 of his engineers to replace the current information technology (old IT) with new cutting-edge equipment (new IT).
Data on the current IT and new IT are as follows:
Data on Old IT and New IT
| Old IT | New IT | |
| Original cost | $300,000 | $135,000 |
| Useful life | 5 years | 3 years |
| Current age | 2 years | 0 years |
| Remaining useful life | 3 years | 3 years |
| Accumulated depreciation | $120,000 | Not acquired yet |
| Current book value | $180,000 | Not acquired yet |
| Current disposal value (in cash) | $95,000 | Not acquired yet |
| Terminal disposal value (in cash 3 years from now) | $0 | $0 |
| Annual computer-related cash operating costs | $40,000 | $10,000 |
| Annual revenues | $1,000,000 | $1,000,000 |
| Annual non-computer-related operating costs | $880,000 | $880,000 |
Black's annual bonus includes a component based on division operating income. He has a promotion possibility next year that would make him a group vice president of Tao Inc.
Required:
Ignoring the time value of money, would Tao Inc. benefit financially from replacing old IT with new IT?
Does Jack Black's incentive bonus plan and future promotion outlook align his interests with those of Tao Inc.? Why or why not?
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Auditing A Practical Approach
Authors: Fiona Campbell, Robyn Moroney, Jane Hamilton, Valerie Warren
2nd Canadian edition
9781118377901, 1118377907, 1119048095, 978-1118849415
