Answer:
Darcy should replace the lift
Explanation:
Scenario 1: Darcy Roofing keeps the old lift
refurbishing costs ($31,000)
no other changes in revenues or costs*
net cash flow = ($31,000)
*The $67,200 spent repairing the lift the previous year are considered sunk costs because they cannot be recovered regardless of what decision the company makes.
Scenario 2: Darcy Roofing purchases a newer lift
cost of newer lift ($132,500)
salvage value of old lift $19,500
reduced costs per year x 6 years = $22,400 x 6 = $134,400
additional rental income x 6 years = $8,000 x 6 = $48,000
net cash flow = $69,400**
**Since we are not given any discount rate, we cannot discount the cash flows to determine the present value of the project. With a discount rate of 0, the NPV of purchasing the lift is much higher than the alternative of keeping the old lift.
