Movie Theatre is considering selling its old popcorn machine and replacing it wi

Question

Movie Theatre is considering selling its old popcorn machine and replacing it with a newer one. The old machine originally cost $6,000 and has been fully depreciated. Annual costs are $4,000. Beufort high school is willing to buy it for $1,000. New equipment would cost $18,000 and annual operating costs would be $1,500. The new machine has an estimated useful life of 5 years, and the old machine will last another 5 years. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /?>

           Please prepare a proposal and determine if we should replace the old equipment.

Explanation / Answer

Case I : Old machine continued

Cost associated for 5 years = 4000*5 = $ 20,000

Case II : New machine purchased

Cost associated for 5 years = 18,000 - 1,000 + 5*1,500 = $ 24,500

Since the cost associated for Case I is less we opt for it.

Note : The interest rate has not been mentioned and is taken as 0.

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