Question

Krauss Company purchased a construction crane three years ago for $180,000. The crane has a current book value of $100,000 and operating expenses excluding depreciation of $12,000 per year. The current market value of this crane is $85,000. If the old crane is kept five more years, its salvage value would be $10,000. A new crane would cost $70,000, have a useful life of five years, and would require $13,000 per year in operating expenses excluding depreciation. The new crane has a salvage value of $20,000 after five years. Based on this information, Krauss should_____________

Answer 1

Krauss Company should compare the total costs of keeping the old crane versus purchasing a new one over five years, including operating expenses and changes in salvage value, then choose the option with the lower total cost.

Step-by-step explanation:

Krauss Company is considering whether to keep its current construction crane or purchase a new one. The decision should be based on a comparison of the total costs associated with each option over the next five years, which would include the operating expenses, the initial purchase cost for the new crane, and the different salvage values for the old and new cranes after five years. The current book value of the old crane and its market value are relevant for understanding the current situation but don't directly impact the decision for future costs.

To compare these costs, the company would calculate the total cost of keeping the old crane for five more years, which includes operating expenses and the decrease in salvage value. Then, they would calculate the total cost of purchasing the new crane, which includes the purchase price, operating expenses over five years, and the increase in salvage value. By comparing these totals, Krauss Company can make an informed decision based on which option is financially more advantageous.

In this case, since specific numerical calculations are not provided, Krauss should perform these calculations and choose the option with the lower total cost over the next five years.