Problem 20-4A (Part Level Submission)
Last year (2016), Richter Condos installed a mechanized elevator for its tenants. The owner of the company, Ron Richter, recently returned from an industry equipment exhibition where he watched a computerized elevator demonstrated. He was impressed with the elevator’s speed, comfort of ride, and cost efficiency. Upon returning from the exhibition, he asked his purchasing agent to collect price and operating cost data on the new elevator. In addition, he asked the company’s accountant to provide him with cost data on the company’s elevator. This information is presented below.
Old ElevatorNew ElevatorPurchase price$120,000$160,000Estimated salvage value00Estimated useful life5 years4 yearsDepreciation methodStraight-lineStraight-lineAnnual operating costs other than depreciation: Variable$35,000$10,000 Fixed23,0008,500
Annual revenues are $240,000, and selling and administrative expenses are $29,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2017, Richter Condos will be able to sell it for $25,000.