Question

One of the employees of RF Corporation recently was involved in an accident with one of the corporation's delivery vans. The corporation is either going to repair the damaged van or sell it as is and buy a comparable used van. Information related to this decision is provided below:

Initial cost of damanged van....................................... $30,000
Accumulated depreciation to date on van..................... $18,000
Salvage value of van immediately before crash............ $ 9,000
Salvage value of van immediately after crash.............. $ 1,000
Cost to repair damaged van....................................... $ 5,000
Cost of a comparable used van................................... $10,000

Based on the information above, RF would be better off by:

A) $1,000 to buy the comparable van.
B) $2,000 to buy the comparable van.
C) $2,000 to repair the damaged van.
D) $3,000 to repair the damaged van.
E) $4,000 to repair the damaged van.

Answer 1

E) $4,000 to repair the damaged van

Step-by-step explanation:

We are given the following data:

•Initial cost of damanged van :$30,000

•Accumulated depreciation to date on van : $18,000

•Salvage value of van immediately before crash: $ 9,000

•Salvage value of van immediately after crash: $ 1,000

Cost to repair damaged van : $5,000

Cost of a comparable used van: $10,000

In this case, the corporation wants to determine whether to repair the damaged van or to sell it and buy a comparable used van.

If the company wants to buy a new van, the net cost would be:

Cost of comparable used van - salvage value of van immediately after crash.

= $10,000 - $1,000 = $9,000.

To purchase a new van, the cost will be $9,000.

But, if the corporation decides to repair the existing van, the cost incurred will be $5,000.

From our calculations, we can see that the corporation will be better off by $4,000 ($9,000-$5,000) if they decide to repair the damaged van, as repairing the damaged van will be a cheaper option compared to buying a new van.