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P7-4A Last year (2013), Richter Condos

Price: $2.50

Last year (2013), 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 Elevator New Elevator
Purchase price  $120,000 $160,000
Estimated salvage value  0 0
Estimated useful life  5 years  4 years 
Depreciation method  Straight-line  Straight-line 
Annual operating costs 
other than depreciation:
 Variable  $35,000 $10,000
 Fixed  23,000 8,500

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
2014, Richter Condos will be able to sell it for $25,000.

(a) Determine any gain or loss if the old elevator is replaced.
(b) Prepare a 4-year summarized income statement for each of the following assumptions:
(1) The old elevator is retained.
(2) The old elevator is replaced.
(c) Using incremental analysis, determine if the old elevator should be replaced.

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