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In: Economics

Mr. Garcia sold his machine for P20,000 after using it for 6 years. He bought a...

Mr. Garcia sold his machine for P20,000 after using it for 6 years. He bought a new machine worth 75,000 with an expected life of 12 years and a salvage value of 2,000. The operating cost is P5,500 per year. The old machine which he bought for P50,000 when new will be useful for 10 years and a junk value of 1,000 but because of appropriate maintenance, it will be useful for another 5 years, no salvage value, with an annual operating cost of twice the new one. If money is worth 12%, was the engineer justified in selling the old machine? Use the ROR method.

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Expert Solution

Answer: The engineer was not justified in selling the machine. Instead, he should have used the machine for another 9 years and then disposed it at a scrap value of 1000. So, the new machine is more expensive for the company, while paying more operating expenses is economical for the company comparatively. Hence, the old machine should not have been sold.
calculations are attached below:

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Rahul Sunny answered 1 year ago
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