Exercise 7-14 Johnson Enterprises uses a computer to handle its sales invoices.

Question

Exercise 7-14 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. New Machine $25,100 Original purchase cost Accumulated depreciation Estimated annual operating costs Remaining useful life Current Machine $14,900 $5,700 $24,700 5 years $19,500 5 years If sold now, the current machine would have a salvage value of $10,100. 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? (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. 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

Explanation / Answer

SOLUTION

(A)

(B) The current machine should be replaced.

Retain Machine ($) Replace Machine ($) Net Income increase / (decrease) Operating costs ($24,700*5), ($19,500*5) 123,500 97,500 26,000 New machine cost 0 25,100 (25,100) Salvage value (old) 0 10,100 10,100 Total 123,500 112,500 11,000

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