CASE 27-1

B. REPLACEMENT FOLLOWING EARLIER REPLACEMENT

Sinclair Company decided to purchase the equipment described in Part A (hereafter called model A equipment). Two years later, even better equipment (called model B) comes on the market and makes the other equipment completely obsolete, with no resale value. The model B equipment costs $500,000 delivered and installed, but it is expected to result in annual savings of $160,000 over the cost of operating the model A equipment. The economic life of model B is estimated to be 5 years. Taxes are to be disregarded.

Questions

1. What action should the company take?

2. If the company decides to purchase the model B equipment, a mistake has been made somewhere, because good equipment, bought only two years previously, is being scrapped. How did this mistake come about?