Question

Zark Company relies heavily on a copier machine to process its paperwork. Recently the copy clerk has not been able to process all the necessary copies within the regular work week.Management is considering updating the copier machine with a faster model.Current Copier New ModelOriginal Purchase Cost $8,000 $15,000Accumulated Depreciation 6,000 0Estimated annual operating costs 6,500 3,000Useful life 5 years 5 years
If sold now, the current copier would have a salvage value of $1,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after five years. Prepare an analysis to show whether the company should retain or replace the machine.

Answer 1

Answer:

Preparation of analysis is shown below:-

Explanation:

Particulars           Retain           Replace                Net income

                           machine        machine             Retain Machine or Replace

                                                                             Machine Increase (Decrease)  

Operating costs   $32,500       $15,000               $17,500

New machine cost 0                  $15,000                ($15,000)

Salvage value         0                  ($1,000)                 $1,000

Total                      $32,500         $29,000               $3,500

Working note  

Operating cost = $6,500 × 5  

= $32,500

Operating cost = $3,000 × 5

= $15,000

As we can see that the machine should able to replace as the $3,500 would be saved in total cost