Question

Exercise 194

Harris Timber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines:

		Old Machine				New Machine
Original purchase cost			$340,000				$370,000
Accumulated depreciation			230,000				—
Estimated life			5 years				5 years

It is estimated that the new machine will produce annual cost savings of $85,000. The old machine can be sold to a scrap dealer for $8,000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives.

Determine whether the company should purchase the new machine. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Do not leave any field blank. Enter 0 for the amounts.)

		Retain Equipment		Replace Equipment		Net Income Increase/(Decrease)
Proceeds from sale of old machinePurchase costAccumulated depreciationNet incremental net incomeCost savingsNew machine cost		$		$		$
Proceeds from sale of old machineNew machine costAccumulated depreciationPurchase costCost savingsNet incremental net income
New machine costCost savingsProceeds from sale of old machineAccumulated depreciationNet incremental net incomePurchase cost		$
Proceeds from sale of old machineNet incremental net incomePurchase costAccumulated depreciationCost savingsNew machine cost		$		$		$

The company

shouldshould not

purchase the new machine.

Answer 1

				Retain	Replace	Net Income
				Equipment	Equipment	Increase/(Decrease)
Cost savings				$            -	$ 4,25,000.00	$ 4,25,000.00
New machine cost				$            -	$ -3,70,000.00	$ -3,70,000.00
Proceeds from sale of old machine				$            -	$        8,000.00	$        8,000.00
Net incremental net income				$            -	$      63,000.00	$      63,000.00
Cost saving from replacement = $ 85000 x 5 years = $ 425000

The compnay should purchase the new machine since it'll result in an increase in net income