Question 5: (24 marks)

Ferris Industries is planning to replace its old equipment.

The old equipment cost was $350 000 five years ago. The old equipment is fully depreciated.

If the new equipment is purchased, arrangements will be made to sell the old equipment. The

old equipment is expected to be sold for only $20 000 on 1 January 2021.

The new equipment will be placed in service on 1 January 2021. The details regarding the

proposal are as follows:

? Expected acquisition cost $290 000

? Expected installation costs $20 000

? Expected investment allowance in Year 1:15%

? Estimated useful life: 7 years

? Expected salvage value which can be realised upon its disposal at the end of 7 years:

$30 000

Expected increase in sales due to the special production run of the new equipment: Year 1 to Year 4000 units each 7: ear 0 The selling price per unit is expected to remain at $300. I The variable cost per unit is expected to be $250. 0 Expected increase in annual xed costs due to the special production run of the new equipment is $62 000