elly Slater desires to purchase a new front office computer system for his Surfers Paradise Inn. After considerable discussion with purveyors, he has narrowed his choices to systems sold by M. Fanning ltd. and Jamie O’Brien and Co. The associated costs of each system are as follows: M. Fanning ltd. O’Brien and Co. Initial Costs 29,000 31,000 Annual Costs: Labour 22,000 22,000 Utilities 800 600 Supplies 1,500 1,500 Maintenance 2,500 1,500 Salvage Value (in 8 years) 3,000 5,000
Kelly Slater desires to purchase a new front office computer system for his Surfers Paradise Inn. After considerable discussion with purveyors, he has narrowed his choices to systems sold by M. Fanning ltd. and Jamie O’Brien and Co. The associated costs of each system are as follows:
|
|
M. Fanning ltd. |
O’Brien and Co. |
|
Initial Costs |
29,000 |
31,000 |
|
Annual Costs: |
|
|
|
Labour |
22,000 |
22,000 |
|
Utilities |
800 |
600 |
|
Supplies |
1,500 |
1,500 |
|
Maintenance |
2,500 |
1,500 |
|
Salvage Value (in 8 years) |
3,000 |
5,000 |
Required:
1.Which are sunk costs?
2.Identify the irrelevant costs and explain why these costs are irrelevant!
3.Prepare a comparative cost analysis for the two alternatives. Ignore the time value of money and taxes. Include the relevant costs.
4.Which alternative do you recommend purchasing? Explain why!
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