Question

A machine purchased three years ago for $303,000 has a current book value using straight-line depreciation of $184,000; its operating expenses are $36,000 per year. A replacement machine would cost $239,000, have a useful life of nine years, and would require $12,000 per year in operating expenses. It has an expected salvage value of $76,000 after nine years. The current disposal value of the old machine is $88,000; if it is kept 9 more years, its residual value would be $15,000.Calculate the total costs in keeping the old machine and purchase a new machine.

Answer 1

Answer: Cost of keeping old machine is $469,000

Cost of Purchasing New Machine is $271,000

Explanation:

Keeping the old machine.

When calculating the cost of keeping the machine you use the disposal value.

Cost = (Disposal Value - Residual Value) + Total Operating Costs for remaining lifetime

Cost = ( 88,000 - 15,000) + ( 36,000 * 11 years)

Cost = 73,000 + 396,000

Cost = $469,000

Cost of keeping old machine is $469,000.

Cost of New machine

Cost = (Disposal Value - Residual Value) + Total Operating Costs for remaining lifetime

Cost = (239,000 - 76,000) + (12,000 * 9)

Cost = 163,000 + 108,000

Cost = $271,000

Cost if New machine purchased,

= $271,000