A machine purchased three years ago for $720,000 has a current book value using

Question

A machine purchased three years ago for $720,000 has a current book value using straight-line depreciation of $400,000; its operating expenses are $60,000 per year. A replacement machine would cost $480,000, have a useful life of nine years, and would require $26,000 per year in operating expenses. It has an expected salvage value of $130,000 after nine years. The current disposal value of the old machine is $170,000; if it is kept 9 more years, its residual value would be $20,000.

Required

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

Explanation / Answer

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

Company should kept old machine

Old machine New machine Operating expense 60000*9 = 540000 26000*9 = 234000 Machine cost 0 480000 Salvage value of machine 0 -170000 Total relevant cost 540000 544000

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