Equipment replacement decision Columbia Enterprises is studying the replacement of some equipment that originally cost $74,000. The

Equipment replacement decision

Columbia Enterprises is studying the replacement of some equipment that originally cost $74,000. The equipment is expected to provide 6 more years of service if $8,700 of major repairs are performed in 2 years. Annual cash operating costs total $27,800. Columbia can sell the equipment now for $36,000; the estimated residual value in 6 years is $5,000.

New equipment is available that will reduce annual cash operating costs to $22,050. The equipment costs $103,000, has a service life of 6 years, and has an estimated residual value of $13,000. Company sales will total $430,000 per year with either the existing or the new equipment.

Columbia has a minimum desired return of 12% and depreciates all equipment by the straight-line method.

Instructions

   a    By using the net present value method, determine whether Columbia should keep its present equipment or acquire the new equipment. Round all calculations to the nearest dollar, and ignore income taxes.

   b    Columbia’s management believes that the time value of money should be considered in all long-term decisions. Briefly discuss the rationale that underlies management’s belief.

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