Economic Analysis A replacement analysis of Bahadur, a pick-and-place robot, purchased 3 years ago for $20,000 has been initiated by the job shop. At the time of purchase Bahadur’s useful life was estimated to be 5 years, with an expected salvage value of $5,000. During the past 3 years,

Question

Economic Analysis

A replacement analysis of Bahadur, a pick-and-place robot, purchased 3 years ago for $20,000 has been initiated by the job shop. At the time of purchase Bahadur’s useful life was estimated to be 5 years, with an expected salvage value of $5,000. During the past 3 years, SL-depreciation has been charged.

Due to recent innovations in microprocessor technology, a new robot is available in the market for $15,000. The robot manufacturer is offering $7,000 for the defender as trade-in. The job shop has researched to conclude that Bahadur can be sold in the open market for $5,000. Doing so will enable the job shop to buy the new versatile robot that will not only do Bahadur’s job but also facilitate integration among the other computer-controlled machines of the plant. Determine Bahadur’s

(a) book value,

(b) economic worth, and

(c) sunk cost

Accepted Answer

Bahadur has already been in use for 3 years of its 5-year useful life. Let us assume that its analysis is being conducted during the end of the third year for possible replacement in the fourth year.

(a) The book value is the difference between the first cost and the cumulative depreciation over 3 years[latex]^{3}[/latex].

Annual straight-line depreciation

[latex]={(P-S)}/{N}[/latex]

[latex]={(\$20,000-\$5,000)}/{5}[/latex]

[latex]=\$3,000[/latex]

Cumulative depreciation over 3 years

[latex]=\$3,000 imes 3[/latex]

[latex]=\$9,000[/latex]

Thus,

Book value = First cost - Cumulative depreciation

[latex]=\$20,000-\$9,000[/latex]

[latex]=\$11,000[/latex]

(b) The economic worth of the defender is its market value, which is $5,000 (given).
(c) If the jobshop replaces Bahadur, it will suffer a capital loss since its market value is lower than the book value, given by

Capital loss = Book value - Market value

[latex]=\$11,000-\$5,000[/latex]

[latex]=\$6,000[/latex]

This $6,000 loss in capital at the time of replacement is the sunk cost.

[latex]^{3}[/latex]It is being assumed that the third-year depreciation will be charged by the year-end.

Question 12.1: Economic Analysis A replacement analysis of Bahadur, a pick-...

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