A machine purchased three years ago for $360,000 has a current book value using
ID: 2580716 • Letter: A
Question
A machine purchased three years ago for $360,000 has a current book value using straight-line depreciation of $200,000, its operating expenses are $30,000 per year. A replacement machine would cost $240,000, have a useful life of nine years, and would require $13,000 per year in operating expenses. It has an expected salvage value of $65,000 after nine years. The current disposal value of the old machine is $85,000, if it is kept nine more years, its residual value would be $10,000 Required Calculate the total costs in keeping the old machine and purchase a new machine. Keep Old Machine Purchase New Machine Total costs Should the old machine be replaced? O Yes O NoExplanation / Answer
Answer:
Old Machine
New Machine
Opportunity Cost
75,000
Replacement cost of new machine
175,000
opportunity cost of using old machine
(30,000*9) for old
(13,000*9) for New
270000
117000
Total cost`
345,000
292,000
Notes:
1
the current book value of the machine and its purchase cost are irrelevant factor for this decesion because ot is sunk cost
2
Net replacement cost if machine are replaced
Cost
240,000
Less: salvage value
-65,000
Replacement cost of new machine
175,000
3
Current salvage value
85,000
Less: salvage at 9th year
-10,000
Opportunity Cost
75,000
_______________________________________
2
Yes, Old machine should be replaced
Old Machine
New Machine
Opportunity Cost
75,000
Replacement cost of new machine
175,000
opportunity cost of using old machine
(30,000*9) for old
(13,000*9) for New
270000
117000
Total cost`
345,000
292,000
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