Question

Bryant Company has a factory machine with a book value of $90,000 and a remaining useful life of 5 years. It can be sold for $30,000. A new machine is available at a cost of $400,000. This machine will have a 5-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $600,000 to $500,000. Prepare an analysis showing whether the old machine should be retained or replaced.

Answer 1

Answer:

The old factory machine should be replaced will result in lower cost

Explanation:

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Answer 2

Answer:

The old machine should be replaced. The rationales are given as below:

* In case we retain the old machine, total cost over five year will be the sum of the below cost items:

- Depreciation of the old machine = Current book value of the old machine = $90,000 ( as the machine has remaining useful life of 5 years and no salvage value at the end of 5 year is given)

- 5-year variable manufacturing cost = annual variable manufacturing costs * 5 = 600,000 * 5 = $3,000,000

=> Total cost over five year = $3,000,000 + $90,000 = $3,090,000

* In case we replace the old machine, total cost over five year will be the sum of the below cost items:

- Loss of selling old machine = Proceed from selling old machine - Book value of old machine = 30,000 - 90,000 = $60,000

- Depreciation of the new machine = Cost of the new machine = 400,000 ( as the machine has useful life of 5 years and no salvage value at the end of 5 year)

- 5-year variable manufacturing cost = annual variable manufacturing costs * 5 = 500,000 * 5 = $2,500,000

=> Total cost over five year = $2,500,000 + $400,000 + 60,000 = $2,960,000

So, as replacing the machine will result in lower cost in comparison to retaining it ( $2,960,000 in comparison to $3,090,000), we should replace the old machine.

Explanation: