Question

Hamilton Company is considering replacing old equipment with new equipment. Both pieces of equipment are expected to have a remaining useful life of 4 years. The total cost of operating each piece of equipment over its four year life is summarized below.

Old Equipment New Equipment Original cost $95,000 Purchase price $70,000 Original expected salvage value 15,000 Expected salvage value 12,000 Current market value 60,000 Depreciation Expenses ($14,500 x 4) 58,000 Current expected salvage value 5,000 Other Operating Expenses ($21,000 x 4) 84,000 Depreciation expenses (13,750 x 4) 55,000 Other operating expenses (20,000 x 4) 80,000
Based on this information, Hamilton should_____________

Answer 1

Hamilton Company should compare the total operating costs and environmental implications of maintaining old equipment versus purchasing new equipment. If repair and operation of the existing equipment are more cost-effective and sustainable, it should opt to maintain rather than replace the equipment. The shift towards longer-lasting, repairable products over disposable goods supports this decision.

Step-by-step explanation:

Considering the decision-making process for Hamilton Company on whether to replace old equipment with new equipment, it is essential to analyze the total cost of operating each piece of equipment over its remaining useful life. If we apply the concept of minimizing costs and avoiding wasteful practices, including the expenses related to planned obsolescence, the company should critically evaluate the environmental cost of manufacturing new equipment against repairing the old one. Furthermore, the economic aspect of this decision relies heavily on comparing the operating costs of both options.

Given that both pieces of equipment have an equal remaining lifespan of four years, the primary consideration for Hamilton should be the total cost associated with each option over that period. If the cost of repair and continued operation of the existing equipment is less than purchasing and operating new equipment, including the consideration of durable goods, then it would be advisable for Hamilton to maintain and repair the old equipment. This not only preserves financial resources but also aligns with a sustainable approach that values craftsmanship and high-quality goods.

Replacing small faulty components rather than whole units should be a priority when such repairs are more cost-effective and environmentally friendly. The information provided signals a shift towards a business model that prioritizes longer-lasting, repairable products over disposable goods, thereby supporting the case for repairing rather than replacing if feasible.