One of the employees of Davenport Corporation recently was involved in an accident with one of the corporation's delivery vans. The corporation is either going to repair the damaged van or sell it as is and buy a comparable used van. Information related to this decision is provided below:

Initial cost of the damaged van $30,000
Accumulated depreciation to date on van $18,000
Salvage value of van immediately before crash $9,000
Salvage value of van immediately after crash $1,000
Cost to repair damaged van $5,000
Cost of a comparable used van $10,000

Based on the information above, Davenport would be financially better off by:

A) $1,000 to buy the comparable van.
B) $2,000 to buy the comparable van.
C) $2,000 to repair the damaged van.
D) $3,000 to repair the damaged van.
E) $4,000 to repair the damaged van.

The correct answer is option (E) $4,000 to repair the damaged van.

Explanation:

Solution

The initial cost of  salvage value  and damaged van immediately before cash are not important in making the decision.

The  cost to repair the damaged van , salvage value of van immediately after the crash, and cost of a comparable used van are important in making the decision.

The next step is to Compute the comparison between repairing the van or buying a comparable used van:

Cost of comparable used van                                    $10,000

Less: Salvage value of van immediately after crash $1,000

The net cost of comparable used van (A)                  $9,000

The cost to repair damaged van                                 $5,000

The net benefit in repairing of damaged van (A-B)   $4,000

Therefore, The company will be better off by $4,000 to repair the damaged van.

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