Question

As the senior accountant at Technology on Demand (TOD), which manufactures mobile technology such as flip phones, smartphones, notebooks, and smartwatches, you are often asked to prepare various financial analysis necessary for decision making. Michelle Dodd, the controller, asked you to evaluate whether a piece of factory equipment should be replaced or kept.

The old piece of factory equipment was purchased four years ago for $875,000. Over the last four years, TOD has allocated depreciation based on the straight-line method. The expected salvage value is $25,000. The current book value of the factory equipment is $425,000. The operating expenses total approximately $45,000 a year. It is estimated that the residual value (market value) of the old machine is $350,000.

The controller is contemplating whether to replace the piece of factory equipment. The replacement factory equipment would consist of a purchase price of $500,000, a useful life of eight years, salvage value of 30,000, and annual operating costs of $35,000.

In consideration of the background, prepare a memo in a Word document to submit to the controller. Your first paragraph would be an introduction paragraph of what the memo is about. Next, you will want to consider the equipment replacement decision. To add clarity to your discussion, you are to insert a table comparing the old equipment to the new equipment. In evaluating the “relevant” costs, what does your analysis show? Do you recommend that the equipment be replaced or kept ongoing for the next eight years? Why or why not?

Answer 1

Before preparing a memo We are going to discus what is a MEMO?
The memo is the short and popular form of memorandum. It is a written tool for internal communication. It rarely goes outside the organization. Memos are primarily written for exchanging information relating to day-to-day functions of the organization
Memos are written internal communication which advise or inform staff of company policies and procedures.
  MEMO
TO :- MICHELLE DODD (CONTROLLER OF TOD)
FROM :- SENIOR ACCOUNTANT OF TOD
DATE :- XXXXXX
SUBJECT- ASKING ME FOR REPLACEMENT OR KEEPING OF MACHINERY  
THANK YOU for asking me for the replacment or keeping the machinary which is four year old and depreciated and has its salvage value of $25000. This machinary can be sold of $350000.
And we have an option to buy a new machinary of costing $500000 it has its salvage value of $30000 and its life is about eight year.


1. Let's do a financial analysis of old machinery

cost of the machine $875000
salvage value $25000
estimated life is not given in the question but we will assume that the estimated life of this machine is eight years
annual depreciation as par straight line basis
depreciation = cost - salvage vlue / no of yeas of life
= $875000 - $25000 / 8
= $106250
current value of old machine is $425000 and its oprating expenses is $45000
now we calculating the profir or loss on old macine if we sold out this machine
PROFIT OR LOSS = SELL - COST
COST OF THE MACHINE = $425000-$106250+$45000
= $363750
LOSS ON SELL OF OLD MACHINE = $350000-363750
= $13750

2. Let's DO FINANCIAL ANALYSIS ON PUCHASING A NEW MACHINE
COST OF NEW MACHINE = $500000
USEFULL LIFE IS EIGHT YEAR
SALVAGE VALUE $30000
ANNUAL OPARATING COST $35000
   CALCULATION OF ESTIMATED DEPRECIATION ON NEW MACHINERY
ASSUME STRAIGHT LINE METHOD  
DEPRECIATION = $500000-$30000/8
= $58750

HERE I ATTACING A IMAGE OF COMPARISION OF BOTH OF THE MACHINE

RECOMMENDATION :- THE MACHINE SHOULD BE REPLACED BY THE TOD DUE TO LAWER IN COST PRICE AND HIGH SALVAGE VLAUE AND LOWER OF OPERATING EXPENSES AND DEPRECIATION.
IF WE SOLD THE OLD MACHINARY WE WILL IN LOSS.