Crane Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, Crane Roofing spent $73,200 refurbishing the lift. It has just determined that another $39,000 of repair work is required. Alternatively, it has found a newer used lift that is for sale for $166,500. The company estimates that both lifts would have useful lives of 6 years. The new lift is more efficient and thus would reduce operating expenses by about $24,400 per year. Crane Roofing could also rent out the new lift for about $10,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for $24,500 if the new lift is purchased.

Prepare an incremental analysis for the life of the machines showing whether the company should replace the equipment.

Question

Business

Finnegan Pruitt

27 September, 00:16

Crane Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, Crane Roofing spent $73,200 refurbishing the lift. It has just determined that another $39,000 of repair work is required. Alternatively, it has found a newer used lift that is for sale for $166,500. The company estimates that both lifts would have useful lives of 6 years. The new lift is more efficient and thus would reduce operating expenses by about $24,400 per year. Crane Roofing could also rent out the new lift for about $10,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for $24,500 if the new lift is purchased.

Prepare an incremental analysis for the life of the machines showing whether the company should replace the equipment.

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Answers (1)

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Tomas Ruiz · Answer 1

The company should replace the equipment.

Explanation:

The cost analysis is calculated as follows;

Retain Replace Net Income

Equipment Equipment Increase (Decrease)

Operating expenses $146,400 0 $146,400

($24,400*6)

Repair costs $39,000 0 $39,000

Rental revenue 0 - $60000 $60,000

($10,000*6)

New machine cost 0 $166,500 - $166,500

Sale of old machine 0 - $24,500 $24,500

Total cost $185,400 $82,000 $103,400

From the calculation above, the equipment should be replaced as it incur a lesser cost compare to when it is retained.