Question

A machine purchased three years ago for $313,000 has a current book value using straight-line depreciation of $186,000; its operating expenses are $32,000 per year. A replacement machine would cost $235,000, have a useful life of ten years, and would require $9,000 per year in operating expenses. It has an expected salvage value of $66,000 after ten years. The current disposal value of the old machine is $75,000; if it is kept 10 more years, its residual value would be $16,000.

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

	Keep Old Machine Purchase New Machine Total costs Should the old machine be replaced? Yes

Answer 1

Answer
Particulars	Keep old machine	Purchase new machine
Original cost	$             313,000	$            235,000
Current value	$             186,000	-
Disposable value now	$               75,000	-
Disposable value in 10 years	$               16,000	$              66,000
Annual cash operating costs	$               32,000	$                9,000
Total Cost	$75000 + (32000*10) - $16000	$235000 + (9000*10) - $66000
Total Cost	$             379,000	$            259,000
Yes- Cost of old machine is higher than new machine.
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