2018 CO Cengage Machine Replacement Decision A company is considering replacing

Question

2018 CO Cengage Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $599,800 and has $349,400 of accumulated depreciation to date, with a new machine that has a purchase price of $483,300. The old machine could be sold for $61,500. The annual variable production costs associated with the old machine are estimated to be $156,200 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,000 per year for eight years. The area of accounting concerned with the effect of alternative courses of action on revenues and costs a.1 Prepare a differentel analysis dated September 13, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) September 13 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues: Proceeds from sale of old machine Costs: Purchase price Variable productions costs (8 years) Income (Loss) a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Replace the old machine Check My Work Previous Next Save and Exit Submit Assignment for Grading

Explanation / Answer

While taking the decision whether to continue with existing machine or replace the same, we need to compare incremental cash outflow with cummulative savings in case cost. In case cummulative savings are more than the incremental cash flow in the begining we must replace the existing machine.

In the give case Cost of New machine is $4,83,300 and Sale value of old machine is $ 61,500 hence incremental cash outflow is diffirence of these two i.e. 4,83,300-61,500= $ 4,21,800

Saving in Cost is 1,56,200-1,01,000= 55,200 is annual saving.

Life of new Machine is 8 years hence total savings will be 55200*8= 4,41,600

From above it is clear that since Savings are more than the incremental cash flow, we should replace the machine.

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