A truck, costing $25,000 and uninsured, was wrecked the very first day it was used. The truck can either be disposed for $5,000 cash and replaced with a similar truck costing $27,000, or rebuilt for $20,000 and be "new" as far as operating characteristics and looks are concerned. The net relevant cost of the replacing option is:

Question

Quizplus · Accepted Answer

The relevant cost of the replacing option is calculated as:
Cost of disposing the wrecked truck + cost of acquiring a new truck - salvage value of the wrecked truck
= $0 + $27,000 - $5,000
= $22,000

The cost of rebuilding the truck is $20,000. Therefore, the net relevant cost of the replacing option is higher than that of the rebuilding option by $2,000 ($22,000 - $20,000). Hence, the better choice would be to rebuild the truck for $20,000.

A Truck, Costing $25,000 and Uninsured, Was Wrecked the Very