Marine Industrial Coatings, Inc. is considering replacing its existing computer system with a new computer system. The new system can offer considerable savings in computer processing and inventory management costs. Information about the existing system and the new system follow:
-Relevant costs for this decision include:
A)the original cost of the existing system.
B)accumulated depreciation.
C)the current salvage value of the existing system.
D)the remaining life of 5 years.

Question

Marine Industrial Coatings, Inc. is considering replacing its existing computer system with a new computer system. The new system can offer considerable savings in computer processing and inventory management costs. Information about the existing system and the new system follow: 
-Relevant costs for this decision include:
A)the original cost of the existing system. 
B)accumulated depreciation. 
C)the current salvage value of the existing system. 
D)the remaining life of 5 years.

Quizplus · Accepted Answer

The only relevant cost in this decision is the current salvage value of the existing system, as it represents the amount of cash flow that can be generated by disposing of the old system in order to acquire the new one. The original cost and accumulated depreciation of the existing system are sunk costs that are not relevant to this decision, and the remaining life of the system is also not relevant as the decision concerns the replacement of the system, rather than the continuation of its use.