A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis?
A) Annual depreciation charge on the old equipment
B) Book value of the old equipment
C) Estimated annual depreciation of the new equipment
D) Cost of the new equipment

Question

Quizplus · Accepted Answer

The cost of the new equipment is a relevant cost for incremental analysis as it represents an additional cost that will be incurred if the company decides to replace the old equipment with the new one. The annual depreciation charge on the old equipment and book value are sunk costs and do not affect the decision to replace the equipment. The estimated annual depreciation of the new equipment is also not relevant as it represents a future cost that will be incurred regardless of whether the equipment is replaced or not.

A Company Is Considering Replacing Old Equipment with New Equipment