Question

Lexigraphic Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Old Machine

Cost of machine, 10-year life $89,000
Annual depreciation (straight-line) 8,900
Annual manufacturing costs, excluding depreciation 23,600
Annual non-manufacturing operating expenses 6,100
Annual revenue 74,200
Current estimated selling price of machine 29,700

New Machine

Purchase price of machine, six-year life $119,700
Annual depreciation (straight-line) 19,950
Estimated annual manufacturing costs, excluding depreciation 6,900

Annual non-manufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

List other factors that should be considered before a final decision is reached. Check all that apply.
a. Are there any improvements in the quality of work turned out by the new machine?
b. What effect does the federal income tax have on the decision?
c. should management have purchased a different model of the old machine?
d. Was the purchase price of the old machine too high?
e. What opportunities are available for the use of the $90,000 of funds ($119,700 less $29,700 proceeds from the old machine) that are required to purchase the new machine?
f. none of these choices is correct.

Answer 1

The decision to replace the old machine with a new machine should consider the quality improvements offered by the new machine, the effect of federal income tax on the financial analysis, and alternative uses of the required investment funds.

Step-by-step explanation:

The factors that should be considered before the Lexigraphic Printing Company makes a final decision on whether to replace the old machine with a new machine include:

• Quality improvements that may be offered by the new machine and its impact on production.
• The effect of federal income tax in the financial analysis, since tax implications can significantly affect the net benefit of the investment.
• Potential opportunities for alternative use of the $90,000 required for the new machine purchase ($119,700 purchase price minus $29,700 from selling the old machine).

Options (c) and (d) are not directly relevant to the decision at hand because they focus on past decisions rather than the current comparison between keeping the old machine or purchasing the new one.