Question

A machine purchased three years ago for $306,000 has a current book value using straight-line depreciation of $190,000; its operating expenses are $38,000 per year. A replacement machine would cost $222,000, have a useful life of eleven years, and would require $10,000 per year in operating expenses. It has an expected salvage value of $76,000 after eleven years. The current disposal value of the old machine is $86,000; if it is kept 11 more years, its residual value would be $10,000. Required Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced

Answer 1

Answer:

A. Total Cost Old machine $424,000

Total Cost New machine $256,000

B. Yes

Explanation:

A..Calculation to determine the total costs in keeping the old machine and purchase a new machine.

OLD MACHINE NEW MACHINE

Opportunity cost/Purchase value=

(86,000-10,000) = $76,000 (222,000-76,000) = $146,000

Operating cost

(38,000*11) = 348,000 (10,000*11) = 110,000

Total Cost $424,000 $256,000

Old machine=($76,000+348,000=$424,000)

New machine=($146,000+$110,000=$156,000)

Therefore the total costs in keeping the old machine is $424,000 and purchasing a new machine is $256,000

2. Yes based on the above calculation the old machine should be replaced as the cost is higher.