Skeller is using an old machine in it\'s printing operations The machine oost 42

Question

Skeller is using an old machine in it's printing operations The machine oost 420000 many years ago. Aocumulated depreciation on the machine is 180000 Skeller is currently reoording 24000 of depreciation each year on the machine. The machine wi ikely last 10 more years but ony if Stelier spends 29000 per year on mararara, in 10 s sanner oan ikety sell the machine for 1000 Today, the none s worth 4S00. Skeler is considering buying a new machine to replace the old one. The new machine will cost 720000. Skeller plans to keep the machine 10 years It can sell the new machine for 95000 at that port Skolor wil depreciate new machine using strwght-lne depreciation at the rate of 62S00 per year (720000-95000), 10·62500) The new machine would allow Skelier to expand servioes. Skeller estmated they would increase ther contrbution margin by 28000 per year Ignoring taxes and time value of money- and based only on the estimates above, compute the difference in costs over the next 10 years given the two atematives Which atemative is preferable (has the lower total cos) Type Keep or Replace How much is the cost of the preferatie alternmative lower than the other aemative? Enter as a postive number

Explanation / Answer

INCREMENTAL INCOME ANALYSIS KEEP REPLACE NET INCOME OLD MACHINE INCREASE/(DECREASE) Annual depreciation 240000 240000 Annual maintenance cost 290000 290000 Annual depreciation 625000 -625000 Salvage value of machine at the end of 10 year -1000 -1000 Salvage value of old machine presently -48000 48000 Annual contribution -280000 280000 Net Income 529000 857000 232000 Yes, The machine shall be replaced. The cost of replacement is lower by $232,000

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