Question

In: Accounting

Acer is contemplating to replace its old machinery with a new one. The cost of old...

Acer is contemplating to replace its old machinery with a new one. The cost of old machinery is 960,000. The old machinery was bought 6 years ago with a total useful life of 13 years. If sold now, the old machinery can be salvaged at $17,000. The existing machinery has the production capacity of 30,000 units. Acer Inc.'s finished product is called Product X which can be sold at $75, and has per unit variable cost of $42. The annual maintenance cost of the existing machinery is $18,000. If replaced, the new machinery can be bought for $600,000 having useful life of 7 years. This replacement will increase the annual capacity from 30,000 units to 35,000 units and also bring savings of $2 in per unit variable cost. The annual maintenance cost of the new machinery would be $29,000 Assume that the company can selll whatever is produced, and the tax rate applicable to the company is 35%. Provide an analysis showing whether the company should replace its old machinery with the new one or not?

Solutions

Expert Solution

Here, Old Machinery's life is 13 Years. Out of which 6 years have been passed. So, we have to do all calculations for remaining 7 years only.


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