Some time choice to be made between retention or replacement of equipment. The primary function of equipment managers is to replace the right equipment at the right time and at the lowest overall cost. Basically, replacement of machine or equipment is a capital investment or long-term decision requiring the use of a discounted cash flow technique. But, here the discussion is confined to short-range problems. The judgment which the owner-manager of a small company makes should be the result of weighing the costs of keeping the old equipment against the cost of its replacement. Therefore, only one aspect of replacement will be dealt with, i.e. how to deal with written down/book value of old equipment. And the differential cost approach is primarily followed because the replacement will invariably involve additional fixed cost. To recognize the better alternative you need to know the total cost of each alternative – keeping the old equipment or buying a replacement. Major considerations relevant to the decision are given below: Show
Items Of Differential Cost:
Items of Differential Benefits:
Information Source:
Notes Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. This preview shows page 13 out of 13 pages. 8.Explain why the book value of equipment is irrelevant in equipment-replacement decisions Get answer to your question and much more 9.Explain how conflicts can arise between the decision model used by a manager and theperformance evaluation model used to evaluate the managerWhy can the conflict between the decision model used by a manager and theperformance model used to evaluate the manager be compared to a chemical change? Get answer to your question and much more We have textbook solutions for you! The document you are viewing contains questions related to this textbook. Small Business Management: Launching & Growing Entrepreneurial Ventures Longenecker/Petty Expert Verified End of preview. Want to read all 13 pages? Upload your study docs or become a Course Hero member to access this document We have textbook solutions for you!The document you are viewing contains questions related to this textbook. The document you are viewing contains questions related to this textbook. Small Business Management: Launching & Growing Entrepreneurial Ventures Longenecker/Petty Expert Verified Newly Uploaded DocumentsNewly Uploaded DocumentsWhy is book value not relevant when making equipment replacement decisions?The book value of old equipment is irrelevant to the decision-making process because it is a sunk cost. The amount is already being incurred by the business and has no further outflow of the funds.
Why is a book value of an asset irrelevant in decision making?The book value of fixed assets like machinery, equipment, and inventory is another example of irrelevant sunk costs. The book value of a machine is a sunk cost that does not affect a decision involving its replacement. Examples of irrelevant costs: Sunk costs: Expenditures which have already been incurred.
What costs are irrelevant in decision making?Fixed overhead and sunk costs are examples of irrelevant costs. For instance, the book value of a company's equipment and machinery cannot change regardless of the managerial decision that is reached.
Why are historical costs irrelevant?Historical costs are irrelevant because they are past costs and, therefore, cannot differ among alternative future courses of action. 11-3 No. Relevant costs are defined as those expected future costs that differ among alternative courses of action being considered.
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Why is the book value of old equipment irrelevant to the equipment replacement decision?
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