Question

Gina Matheson owns and operates a successful florist shop in Bloomington, Indiana. Two years ago, Gina purchased a refrigerated display case for $20,000, expecting to use it for 10 years. Unfortunately, Gina's assistant recently (and accidentally) left the case's door open during the night and the motor burned out. The local repair shop has informed Gina that it will cost $4,500 in parts and labor to fix the refrigerated display case (the case needs a new motor and wiring). On the upside, if the existing case is repaired then it will last another 10 years.
Rather than repair the existing display case, Gina is considering purchasing a new refrigerated display case. A new display case would cost Gina $21,000 and last 10 years.
In addition, the new case has better insulation than the existing case, and Gina believes that purchasing the new case will save her $100 per month in utility bills.
Ignore the time value of money in all of the subsequent questions. Also, ignore income taxes except where instructed otherwise.

Required:
a. Should Gina repair the existing case or purchase the new case? In addition to the facts above, assume that the existing case has a book value of $16,000 but, given its current condition, cannot be sold (i.e., the existing case has a current sales value of $0).
b. Assume the existing display case has a book value of $10,000 rather than $16,000. Would this information affect your answer to part (a)?
c. Assume the existing case has a book value of $16,000 and can be sold in its current condition for $5,000 (rather than $0 as assumed in part [a]). Would this information affect your answer to part (a)?
d. (Advanced). Assume that the existing case has a book value of $16,000 and can be sold for $5,000. In addition, assume that Gina pays income taxes equal to 30% of profit. Finally, Gina depreciates all of her assets using straight-line depreciation and zero assumed salvage value. In light of this information, should Gina repair the existing case or purchase the new case?
e. What other factors should Gina likely consider in her decision regarding whether to repair or replace her existing refrigerator display case?



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  • CreatedFebruary 20, 2013
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