10) The manager at Elite Transportation Company is exploring options to determine if it is cost effective to purchase the new vehicle, or keep the existing vehicle. The new vehicle could offer a considerable amount of savings in operating costs. The manager compiled the following information:
Existing vehicleNew vehicle
Original cost$45,000$85,000
Annual operating cost$17,000$9,500
Accumulated depreciation$30,000
Current salvage value of existing van$21,250
Remaining life9 years9 years
Salvage value in 9 years$0$0
Required:
Compute the book value of the existing van and identify the irrelevant costs. If the manager purchases the new vehicle, what is the impact on operating income over the next ten years?
11) The manager at the Doughnut Factory is considering replacing the old doughnut machine with a newer model. The managerial accountant provided the following information:
Old MachineReplacement Machine
Original Cost$1,200,000$800,000
Useful life in years63
Current age in years40
Remaining useful life
Accumulated depreciation$700,000Not yet acquired
Book value$500,000Not yet acquired
Current disposal value, cash$60,000Not yet acquired
Terminal disposal value (2 years) $0$0
Annual operating costs, maintenance,$900,000$560,000
energy, repairs, and coolants
Required:
Discuss whether the following costs are relevant or irrelevant costs:
Book value
Current disposal value on old machine
Cost of new machine