There is yet another potential conflict between the

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Unformatted text preview: commo n to both alternat ives. 2. The net difference would be unaffected. Any number may be subst ituted for the origina l $20,000 figure wit hout changing the fina l answer. Of course, the net cash outflows under both alternat ives would be high. The Auto Wash manager really blundered. However, keeping the o ld equipment will increase the cost of the blunder to the cumulat ive tune o f $8,000 over the next four years. 3. Book value is irrelevant in decisio ns about the replacement of equipment, because it is a past (historical) cost. All past costs are down the drain. Nothing can change what has alread y been spent or what has already happened. The $20,000 has been spent. How it is subsequent ly accounted for is irrelevant. The analysis in requirement (1) clearly shows that we may completely ignore the $20,000 and still have a correct analys is. The only relevant items are those expected future items that will differ among alternat ives. Despite the econo mic analysis shown here, many managers would keep the o ld machine rather than replace it. Why? Because, in many organizat ions, the inco me statements of part (2) would be a principal means o f evaluat ing performance. Note that the first­year operating inco me would be higher under the “keep” alternat ive. The conventional accrual account ing model might mot ivate managers toward maximiz ing their first­year reported operating inco me at the expense of lo ng­run cumulat ive betterment for the organization as a who le. This crit icism is often made of the accrual account ing model. That is, the action favored by the “correct” or “best” econo mic decisio n model may not be taken because the performance­evaluat ion model is either inconsistent with the decisio n model or because the focus is on only the short­run part of the performance­evaluation model. There is yet another potential conflict between the decisio n model and the performance evaluat ion model. Replacing the machine so soon after it is purchased may reflect badly on the manager’s capabilit ies and performance. Why didn’t the manager search...
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