Certain production equipment used by Dayton Mechanical has become obsolete relative to current technology. The company is considering whether it should keep or replace its existing equipment. To aid in this decision, the company’s controller gathered the following data: Old EquipmentNew EquipmentOriginal cost$770,000$871,200Remaining life5 years5 yearsAccumulated depreciation$347,600$0Annual cash operating costs$140,800$35,200Current salvage value$193,600NASalvage value in five years$0$0a. What is the total dollar amount of any sunk costs in the data. $Answer b. What is the total dollar amount of any irrelevant (nondifferential) future costs. $Answer c. What is the total dollar amount of all relevant costs to the equipment replacement decision. $Answer d. What is the total dollar amount of the opportunity costs associated with the alternative of keeping the old equipment? $Answer e. What is the incremental cost to purchase the new equipment? $Answer

Sunk cost are cost which are incurred in past and not relevant for decision making

Certain production equipment used by Dayton Mechanical has become obsolete relative to current technology. The company is considering whether it should keep or replace its existing equipment. To aid in this decision, the company’s controller gathered the following data: Old Equipment New

Certain production equipment used by Dayton Mechanical has become obsolete relative to current technology. The company is considering whether it should keep or replace its existing equipment. To aid in this decision, the company’s controller gathered the following data: Old Equipment New

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 51P: Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new...

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	Old Equipment	New Equipment
Original cost	$770,000	$871,200
Remaining life	5 years	5 years
Accumulated depreciation	$347,600	$0
Annual cash operating costs	$140,800	$35,200
Current salvage value	$193,600	NA
Salvage value in five years	$0	$0

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Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
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