Question

Tesla management are trying to decide whether to keep an older piece of machinery or buy a replacement. Management was presented with the following information to assist in their decision: a machine purchased three years ago for 317,000 has a current book value using straight-line depreciation of176,000; its operating expenses are 37,000 per year. A replacement machine would cost233,000, have a useful life of eleven years, and would require 9,000 per year in operating expenses. It has an expected salvage value of76,000 after eleven years. The current disposal value of the old machine is 85,000; if it is kept eleven more years, its residual value would be16,000. Calculate the total costs in keeping the old machine and purchasing a new machine. Should the old machine be replaced?

Answer 1

To decide whether to keep an older machine or buy a replacement, we can calculate the total costs over the machine's useful life. By comparing the costs of operating expenses, depreciation, disposal value, and salvage value, we can determine the best option.

Step-by-step explanation:

To calculate the total costs of keeping the old machine and purchasing a new machine, we need to consider the operating expenses, depreciation, disposal value, and salvage value. For the old machine, the total costs over eleven years would be the operating expenses of $37,000 per year multiplied by eleven, plus the residual value of $16,000.

For the new machine, the total costs would be the purchase cost of $233,000, plus the operating expenses of $9,000 per year multiplied by eleven, minus the salvage value of $76,000.

By comparing the total costs for each option, we can determine whether the old machine should be replaced.