The Quintana Company decided to purchase the equipment described in Problem 14.35 (hereafter called "model A" equipment). Two years later, even better equipment (called "model B") came onto the market, making model A obsolete, with no resale value. The model B equipment costs $300,000 delivered and installed, but it is expected to result in annual savings of $75,000 over the cost of operating the Model A equipment. The economic life of model B is estimated to be 10 years with a zero salvage value, (model B also is classified as a seven-year MACRS property.)
(a) What action should the company take?
(b) If the company decides to purchase the model B equipment, a mistake must have been made, because good equipment (bought only two years previously) is being scrapped. How did this mistake come about?