Bend Manufacturers is considering investing in a new truck that will be used to deliver its custom-made furniture.The truck currently used by Bend cost the company $72,000 eight years ago.Two years from now the company anticipates spending $20,000 to overhaul the old truck,at which time the truck could be used for an additional 10 years.The old truck costs $8,000 per month in gas,insurance,and other costs to operate.Ron Shop,Controller of Bend Manufacturers,is considering the purchase of a new truck which will cost $100,000 and which has a useful life of 10 years.The new truck will only cost $4,800 per month to operate,but will require an overhaul 8 years from now that is expected to cost $8,000.Ron believes the old truck could be sold for $16,000.If the new truck is purchased,he estimates that the new truck could be sold for $28,000 at the end of its useful life.Which of the following is not a relevant cash flow in the decision to replace the truck?

Question

Quizplus · Accepted Answer

The purchase price of the old truck is not relevant to the decision to replace the truck, as it is a sunk cost that has already been incurred and cannot be changed. Relevant cash flows include the cost savings from operating the new truck, the cost of overhauling the old truck, the salvage value of the old truck, and the anticipated resale value of the new truck at the end of its useful life.

Bend Manufacturers Is Considering Investing in a New Truck That