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Problem 9.1 Incremental Analysis Problem: Keep or Replace The vice president of finance for the Acme Manufacturing Company authorized the company's management accountant to collect
Problem 9.1 Incremental Analysis Problem: Keep or Replace The vice president of finance for the Acme Manufacturing Company authorized the company's management accountant to collect data pertaining to the purchase of new manufacturing equipment. If purchased, the new equipment will replace old equipment. The following information was obtained from various sources by the accountant: Old Equipment New Equipment Book value of old equip. $50,000 List price of new equipment $150,000 Life of equipment (years) 5 5 Trade-in allowance (old) $15,000 Operating expenses (per year) $50,000 $ 5,000 Salvage value (end of life) $ 5,000 $ 10,000 If purchased, a 10%,5 year installment loan will be obtained. Interest will be paid annually. Required: 1. What is the incremental cost (net benefit) of the replace decision (purchasing the new equipment?) $ 2. What is the total relevant cost of the keep decision? $ 3. What is the total relevant cost of the replace decision? $ 4. What amount of cost in this problem may be considered to be sunk cost? $ 5. Assume that the company's marginal tax rate is 40%. What is the incremental cost on an after-tax basis? $
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