Final answer:
Krauss Company should purchase the new crane as it presents a lower total cost of $115,000 over five years compared to $150,000 for keeping the old crane.
Step-by-step explanation:
Decision on Equipment Replacement
Krauss Company is in a position where it must decide whether to keep its current construction crane or to purchase a new crane. The given financial details allow us to compare the costs associated to both options. The relevant costs to consider for such decisions include the current market value, operating expenses, salvage value, and cost of the new equipment.
If Krauss keeps the old crane for five more years, it will incur operating expenses of $12,000 per year, totaling $60,000, and it will have a salvage value of $10,000 by the end of this period. The loss in value from the current book value of $100,000 to the salvage value is $90,000. So, the total cost of keeping the old crane for another five years would be the sum of the operating expenses and the loss in the crane's value, which is $150,000 ($60,000 operating expenses + $90,000 loss in value).
The new crane will cost $70,000 and have operating expenses of $13,000 per year, resulting in $65,000 over five years. With a salvage value of $20,000, the cost of the new crane over the five years will be the initial purchase price plus the operating expenses minus the salvage value, which totals $115,000 ($70,000 purchase price + $65,000 operating expenses - $20,000 salvage value).
Comparing the two scenarios, Krauss Company should purchase the new crane because it has a lower total cost of $115,000 over five years, compared to $150,000 if they keep the old crane. It is crucial for businesses to assess such decisions carefully to minimize expenses and optimize asset utilization.