Problem:
Paul Smith is considering replacing Jones & Smith's present dishwasher with a new energy-efficient model.
Although the old dishwasher has a present book value of $1000, its current market value is $2000 and if held for five more years, this would drop to $300.
If Paul decides not to buy the new machine, approximately $500 of repairs must be performed on the present dishwasher.
The following is a schedule of expected annual expenses foe each option over the next five years.
|
Kepp Present Dishwasher |
Buy New Dishwasher |
| Maintenance |
$400 |
$200 |
| Labor |
12000 |
12000 |
| Energy |
800 |
500 |
| Water |
400 |
400 |
The new machine would cost $7000 and is expected to have a salvage value of $2000 at the end of five years.
1. Which costs are irrelevant?
2. Which alternative should Paul choose? Support your decision with only relevant numbers.