Question

Kahn Company paid $240,000 to purchase a machine on January 1, Year 1. During Year 3, a technological breakthrough resulted in the development of a new machine that costs $300,000. The old machine costs $100,000 per year to operate, but the new machine could be operated for only $36,000 per year. The new machine, which will be available for delivery on January 1, year 3, has an expected useful life of four years. The old machine is more durable and is expected to have a remaining useful life of four years. The current market value of the old machine is $80,000. The expected salvage value of both machines is zero.
Required:
Based on this information, recommend whether to replace the machine. Support your recommendation with appropriate computations.

Answer 1

Answer:

Yes, the machine should be replaced

Explanation:

The computation is shown below:

Particulars              old Machine            New machine

Purchase price                                       $300,000

Less:

Salvage value                                        -$80,000

Operating cost         $400,000              $144,000

                          ($100,000 × 4 )        ($36,000 × 4)

Total cost                 $400,000                $364,000

So, the financial advantage is

= $400,000 - $364,000

= $36,000

Since there is a financial advantage of $36,000 so the old machine should be replaced with the new machine