James Inc. machine is unreliable, results in a significant amount of downtime, e
ID: 2352810 • Letter: J
Question
James Inc. machine is unreliable, results in a significant amount of downtime, excessive labor costs, and is therefore expected to have no salvage value. Management is considering replacing the machine with a more efficient one, which will minimize downtime and excessive labor costs. Given the rapid pace of technological advances, the new machine would also have no salvage value. Data are presented below for the two machines:Old Machine New Machine
Original purchase cost 200,000 $90,000
Accumulated depreciation 30,000 N/A
Estimated useful life 5 years remaining 5 years
Annual variable costs to operate $130,000 $120,000
Determine whether the company should purchase the new machine.
(show all your work/computations)
Retain Old Machine Buy New Machine
Variable costs to operate
New machine cost
Total costs
Explanation / Answer
retained old machine
buy new machine
variable costs to operate
650000
600000
new machine cost
0
90000
total costs
650000
690000
They should keep the old machine
retained old machine
buy new machine
variable costs to operate
650000
600000
new machine cost
0
90000
total costs
650000
690000
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