Problem 9-1 Making an Equipment Replacement Decision (LO1 - CC2) Murl Plastics I

Question

Problem 9-1 Making an Equipment Replacement Decision (LO1 - CC2) Murl Plastics Inc. purchased a new machine one year ago at a cost of $42,000. Although the machine operates well, the president of Murl Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine would slash annual operating costs by two-thirds, as shown in the comparative data below: Present Machine Proposed New Machine $63,000 $42,000 Purchase cost new Estimated useful life new Annual operating costs Annual straight-line depreciation Remaining booK value Salvage value now Salvage value in five years 6 years 5 years $29,400 7,000 35,000 7,000 0 $ 9,800 12,600 0 In trying to decide whether to purchase the new machine, the president has prepared the following analysis Book value of the old machine Less: Salvage value $35,000 7,000 Net loss from disposal $28,000 "Even though the new machine looks good," said the president, "we can't get rid of that old machine if it means taking a huge loss on it. We'll have to use the old machine for at least a few more years." Sales are expected to be $147,000 per year, and selling and administrative expenses are expected to be $88,200 per year, regardless of which machine is used.

Explanation / Answer

Answer 1 Summary Income Statement 5 Years Summary Keep Old Machine Buy New Machine Difference Sales $735,000.00 $735,000.00 $0.00 Less : Expenses $0.00 - Operating Cost $147,000.00 $49,000.00 -$98,000.00 - Depreciation $35,000.00 $63,000.00 $28,000.00 - Loss on sale of old machine $0.00 $28,000.00 $28,000.00 - Selling and adminsitrative expense $441,000.00 $441,000.00 $0.00 Total Expenses $623,000.00 $581,000.00 -$42,000.00 Net Income $112,000.00 $154,000.00 $42,000.00 Answer 2 Net advantage of purchasing the new machine is $42000.

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