Answer:
Kim Inc.
The net advantage (disadvantage) of replacing the old equipment with the new equipment is:
= $7,500.
Explanation:
a) Data and Calculations:
Old Equipment New Equipment
Purchase price $262,500 $450,000
Accumulated depreciation 95,000 0
Annual operating costs 300,000 245,000
Total operating costs for 10 years 3,000,000 2,450,000
Salvage 92,500 0
Total incremental cost $2,907,500 $2,900,000
b) The net advantage obtained by Kim for replacing the old equipment with the new equipment is $7,500 ($2,907,500 - $2,900,000). Note that the purchase price of the old equipment with its accumulated depreciation are not relevant costs. This case is worked out without taking into account the time value of money. Assuming that the present value of the cash flows was computed, a different result and conclusion would be reached.
