Question

Groves City is contemplating the purchase of a new snow plow to replace its old plow that was purchased 3 years ago. Information related to the two plows is provided below: Old Plow New Plow Purchase price of plow $ 40,000 $ 30,000 Current salvage value $ 18,000 --- Accumulated depreciation $ 5,000 --- Remaining useful life 5 years 5 years Annual operating costs $ 13,000 $ 8,000 Over the next 5 years, how much will Groves City be able to save by buying the new snow plow?

Answer 1

Answer:

It will be a financial advantage of 13,000 dollars

Explanation:

REPLACEMENT  

                       Maintain      Replace         Differential

purchase                     (30,000)     (30,000)

proceeds from sale        18,000        18,000

cost                (65,000)    (40,000)      25,000

result                (65,000)    (52,000)       13,000

In the replacement alternative The new machine will be purchased.

The old one will sale at their salvage value

the total cost will be calcualte by multiplying by 5 their operating cost.

Then we calcualte the differential income.