The irrigation system a farmer uses cost $10,000 eight years ago. It will last another 25 years
Question:
The irrigation system a farmer uses cost $10,000 eight years ago. It will last another 25 years without additional investment. With that system, he produces crops valued at $3,000 per year at a cost of $1,000 per year. A new system would cost $15,000 to install, but would increase production to $7,000 per year. Operating cost would be $2,500 per year. The farmer would have to refurbish the new system 12 years after installation at a cost of $5,000. Assume that investment in the new system occurs at the start of the first year, that revenue and operating cost occur at the end of each year and do not change over the 25 years, and that both systems have a salvage value of $1,000 at the end of 25 years. Assume a 6-percent discount rate. Should the farmer replace his existing system?
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher