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Do It! Review 20-5

Darcy Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, Darcy Roofing spent $68,400 refurbishing the lift. It has just determined that another $33,000 of repair work is required. Alternatively, it has found a newer used lift that is for sale for $139,500. The company estimates that both lifts would have useful lives of 6 years. The new lift is more efficient and thus would reduce operating expenses by about $22,800 per year. Darcy Roofing could also rent out the new lift for about $8,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for $20,500 if the new lift is purchased.

Prepare an incremental analysis for the life of the machines showing whether the company should replace the equipment. (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Retain

Equipment Replace

Equipment Net Income

Increase (Decrease)

Operating expenses $ $ $

Repair costs

Rental revenue

New machine cost

Sale of old machine

Total cost $ $ $

Do It! Review 20-5 Darcy Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, Darcy Roofing spent $68,400 refurbishing the lift. It has just determined that another $33,000 of repair work is required. Alternatively, it has found a newer used lift that is for sale for $139,500. The company estimates that both lifts would have useful lives of 6 years. The new lift is more efficient and thus would reduce operating expenses by about $22,800 per year Darcy Roofing could also rent out the new lift for about $8,000 per year. The old lift is not suitable for rental The old lift could currently be sold for $20,500 if the new lift is purchased Prepare an incremental analysis for the life of the machines showing whether the company should replace the equipment. (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g.-45 or parentheses e.g. (45)) Retain Replace Net Income Operating expenses Repair costs Rental revenue New machine cost Sale of old machine Total cost Click if you would like to Show Work for this question: Open Show Work

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