Question

Pharoah Company has a factory machine with a book value of $169,000 and a remaining useful life of 6 years. A new machine is available at a cost of $246,500. This machine will have a 6-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $595,000 to $495,000. Prepare an analysis that shows whether Pharoah should retain or replace the old machine. (If an amount reducesthe net income then enter with a negative sign preceding the number or parenthesis, e.g. -15,000, (15,000).) Keep Equipment Replace Equipment NetIncome Increase (Decrease) Variable costs $ $ $ New machine cost $ $ $ The old factory machine should be .

Answer 1

Pharoah Company should replace the old machine with the new machine, as it has a lower total cost than retaining the old machine.

Step-by-step explanation:

To determine whether Pharoah Company should retain or replace the old machine, we need to compare the costs of the two options. The old machine has a book value of $169,000 and a remaining useful life of 6 years. The new machine costs $246,500 and has a 6-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $595,000 to $495,000.

In order to analyze the costs, we need to calculate the total cost for each method. For the old machine, the total cost would be the annual variable manufacturing costs of $595,000 multiplied by the remaining useful life of 6 years, which equals $3,570,000. For the new machine, the total cost would be the cost of the machine, which is $246,500. Therefore, the total cost for the new machine would be $246,500.

Based on this analysis, Pharaoh Company should replace the old machine with the new machine, as it has a lower total cost than retaining the old machine.