Johnson Enterprises uses a computer to handle its sales invoices. Lately, busine
ID: 2460182 • Letter: J
Question
Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing. Current Machine New Machine Original purchase cost $15,000 $25,000 Accumulated depreciation $6,000 _ Estimated annual operating costs $25,000 $20,000 Remaining useful life 5 years 5 years If sold now, the current machine would have a salvage value of $6,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years. Should the current machine be replaced? (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Retain Machine Replace Machine Net Income Increase (Decrease) Operating costs $ $ $ New machine cost Salvage value (old) Total $ $ $ The current machine should be retainedreplaced.
Explanation / Answer
Answer:
(Note: operating cost = estimated annual operating cost * useful life)
The current machine should be replaced. The incremental analysis shows that net income for the five year period will be $6000 higher by replacing the current machine.
Retain machine Replace machine Net income increase (decrease) Operating cost $ 1,25,000.00 $ 1,00,000.00 $ 25,000.00 New machine cost (Depr.) $ - $ -25,000.00 $ -25,000.00 Salvage value (old) $ - $ 6,000.00 $ 6,000.00 Total $ 1,25,000.00 $ 81,000.00 $ 6,000.00Related Questions
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