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A machine purchased three years ago for $313,000 has a current book value using straight-line depreciation...

A machine purchased three years ago for $313,000 has a current book value using straight-line depreciation of $180,000; its operating expenses are $32,000 per year. A replacement machine would cost $228,000, have a useful life of eleven years, and would require $11,000 per year in operating expenses. It has an expected salvage value of $77,000 after eleven years. The current disposal value of the old machine is $88,000; if it is kept 11 more years, its residual value would be $11,000.

Required
Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced?

Solutions

Expert Solution

Calculation of total cost
Particulars Keep Old Replace with New
Operating Cost                             352,000                                    121,000
Cost of New Machine                                    228,000
Salvage value of old machine, if sold                                    (88,000)
Residual Value                             (11,000)                                    (77,000)
Total Avoidable Cost 341000 184000
Should the old machine be replaced Yes

ekkarill92 answered 2 years ago
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