Question

Walton Company paid $94,000 to purchase a machine on January 1, 2017. During 2019, a technological breakthrough resulted in the development of a new machine that costs $117,000. The old machine costs $52,000 per year to operate, but the new machine could be operated for only $7,000 per year. The new machine, which will be available for delivery on January 1, 2019, 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 $44,000. The expected salvage value of both machines is zero.
Required:a. Calculate the total avoidable costs in keeping the old machine and buy a new machine.b. Should the machine be replaced?YesNo

Answer 1

Answer and Explanation:

The computation of total avoidable costs is shown below:-

Particulars              Keep old machine        Buy New machine

Opportunity cost of

buying the old

machine                          $44,000

Purchase amount                                                    $117,000

Operating expenses     $208,000

($52,000 × 4 years)

Operating expenses

($7,000 × 4 years)                                                   $28,000

Total avoidable costs       $252,000                     $145,000

b. The new machine cost is lower to the lower one so it can be replaced.