Exercise 20-14 Johnson Enterprises uses a computer to handle its sales invoices.

Question

Exercise 20-14 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 Current Machine $15,300 $6,200 $24,800 S years New Machine $25,100 Original purchase cost Accumulated depreciation Estimated annual operating costs $19,800 Remaining useful life S years If sold now, the current machine would have a salvage value of $10,800. 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).)

Explanation / Answer

Retain machine Replace machine Net income increase(decrease) Operating costs 124000 99000 25000 New machine cost 25100 -25100 Salvage value(old) -10800 10800 Total 124000 113300 10700 The current machine should be replaced

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