Question

Coronado Industries is contemplating the replacement of an old machine with a new one. The following information has been gathered:
Old Machine New Machine
Price $400000 $800000
Accumulated Depreciation 120000 -0-
Remaining useful life 10 years -0-
Useful life -0- 10 years
Annual operating costs $320000 $240000

If the old machine is replaced, it can be sold for $32000. The company uses straight-line depreciation with a zero salvage value for all of its assets. The net advantage (disadvantage) of replacing the old machine is:_______

Answer 1

Answer:

$32,000

Explanation:

Net advantage = Annual operating cost

Net advantage = [(Old machine - New machine)*10 life] - New machine cost + Old machine cost

Net advantage = [($320000 - $240000)*10] - $800000 + $32000

Net advantage = [($80000)*10 - $768,000

Net advantage = $800,000 - $768,000

Net advantage = $32,000

So, the net advantage of replacing the old machine is $32,000