You Are Considering Whether to Replace an Existing Flow Meter

question 12

Essay

You are considering whether to replace an existing flow meter. The existing meter can be sold now for $50 or it can be sold in 1 year for $10. It costs $30 per year to operate and maintain. A new meter costs $400 and has a 10-year life. It could be sold for $40 at the end of its life. The new meter costs $14 per year to operate and maintain. What do you recommend if the cost of capital is 12%?

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Definitions:

Aging of Receivables Method

An accounting technique used to estimate the amount of and provision for doubtful accounts by categorizing receivables according to the length of time they have been outstanding.

Direct Write-off Method

An accounting method in which uncollectible accounts receivable are directly written off against income at the time they are deemed irrecoverable.

Aging Report

A financial report that categorizes a company's accounts receivable according to the length of time an invoice has been outstanding.

Balance Sheet

A balance sheet is a financial statement that portrays a company's financial position at a specific point in time, listing assets, liabilities, and shareholders' equity.