Question

A machine purchased three years ago for $85,000 has a current book value using straight-line depreciation of $55,000; its operating expenses are $14,000 per year. The current disposal value of the old machine is $30,000; if it is kept 5 (five) more years, its residual value would be $5,000. A replacement machine would cost $100,000, have a useful life of 5 (five) years, and would require $4,000 per year in operating expenses. It has an expected salvage value of $10,000 after 5 (five) years.

Required: Based on this information, should the old machine is replaced? Support your answer with appropriate documentation.

Answer 1

It is better Not to Replace the Old Machine.

Explanation:

1) Total Cost incurred to replace new machine[$ 110,000] is more than cost to be incurred to maintain the old machine [$ 95,000.So, It is better to maintain old machine

Working:

Description	Use Old Machine	New Machine Replace
Disposal Value / Replace Machine Cost	$                   30,000	$                           100,000
Less: Salvage Value	$                   (5,000)	$                           (10,000)
Net Value [A]	$                   25,000	$                             90,000
Operating Cost per year	$                   14,000	$                                4,000
Number of Years	5	5
Total Operating Cost [B]	$                   70,000	$                             20,000
Total Cost [A+B]	$                   95,000	$                           110,000