Based on the net cash flow, it seems more financially favorable to trade the old crane for a new one.
The book value of an asset is its original cost minus accumulated depreciation. Assuming straight-line depreciation over the 10-year period, the annual depreciation is $71,000 / 10 = $7,100.
After 2 years, the accumulated depreciation is 2 * $7,100 = $14,200.
The current book value is $71,000 - $14,200 = $56,800.
If the old crane is used for another 4 years, its estimated market value would be $25,000.
Now, let's compare the alternatives:
Option 1: Keep the Old Crane for 4 More Years:
Book Value in 4 years: $56,800 (unchanged)
Market Value in 4 years: $25,000
Option 2: Trade the Old Crane for a New One:
Cost of new crane: $93,000
Salvage value of old crane: $25,000
Based on the net cash flow, it seems more financially favorable to trade the old crane for a new one.
An entrepreneurial civil engineer who owns his own design/build company purchased a small crane 2 years ago at a cost of $71,000. At that time, it was expected to be used for 10 years and then traded in for its salvage value of $10,000. Due to increased construction activities, the company would prefer to trade for a new, larger crane now which will cost $93,000. The com- pany estimates that the old crane can be used, if necessary, for another 4 years, at which time it will have a $25,000 estimated market value. Its current market value is estimated to be $39,000, and if it is used for another 4 years. I si favorable to trade the old crane for a new one?