Michael Trencher, a concrete layer, bought his current cement mixer two years ago for $9000, and it has one more year of life remaining. He is using straight-line depreciation for the mixer. He could purchase a new mixer for $1900, but it would only last one year. Michael knows that the new mixer would save him $2600 in annual operating expenses compared to the existing one. Consequently he has decided against buying the new mixer, since doing so would result in a loss of $400 over the next year.
1. Explain how Michael arrived at a $400 loss for the next year if the new cement mixer were purchased?
2. Evaluate Michael’s analysis and decision.
3. Prepare a correct analysis of the decision.