On January 2, 2011, Riverside Hospital purchased a $100,000 special radiology scanner from Faital Inc. The scanner has a useful life of five years and will have no disposal value at the end of its useful life. The straight-line method of depreciation is used on this scanner. Annual operating costs with this scanner are $120,000.
Approximately one year later, the hospital is approached by Alliant Technology salesperson Jinsil Soon, who indicates that purchasing the scanner in 2011 from Faital was a mistake. She points out that Alliant has a scanner that will save Riverside Hospital $25,000 a year in operating expenses over its four-year useful life. She notes that the new scanner will cost $115,000 and has the same capabilities as the scanner purchased last year. The hospital agrees that both scanners are of equal quality. The new scanner will have no disposal value. Alliant agrees to buy the old scanner from Riverside Hospital for $30,000.
Instructions
(a) Assume Riverside Hospital sells its old scanner on January 2, 2012. Calculate the gain or loss on the sale.
(b) Using incremental analysis, determine whether Riverside Hospital should purchase the new scanner on January 2, 2012.
(c) Explain why the hospital might be reluctant to purchase the new scanner, regardless of the results indicated by the incremental analysis in (b).