On January 2, 2016, Able Hospital purchased a $100,000 special radiology scanner from Xray Inc. The scanner has a useful life of 5 years and will have no disposal value at the end of its useful life. The straight-line method of depreciation is used on this scanner. Annual operating costs with this scanner are $120,000. Approximately one year later, the hospital is approached by New Technology salesperson Shauna Larsen, who indicated that purchasing the scanner in 2016 from Xray Inc. was a mistake.

She points out that New has a scanner that will save Able Hospital $25,000 a year in operating expenses over its 4-year useful life. She notes that the new scanner will cost $115,000 and has the same capabilities as the scanner purchased last year. The hospital agrees that both scanners are of equal quality. The new scanner will have no disposal value. Larsen agrees to buy the old scanner from Able Hospital for $30,000.

Instructions

(a) If Able Hospital sells its old scanner on January 2, 2017, compute the gain or loss on the sale.

(b) Using incremental analysis, determine if Able Hospital should purchase the new scanner on January 2, 2017.

(c) Explain why Able Hospital might be reluctant to purchase the new scanner, regardless of the results indicated by the incremental analysis in (b).