Question

A machine purchased three years ago for $315,000 has a current book value using straight-line depreciation of $182,000; its operating expenses are $31,000 per year. A replacement machine would cost $222,000, have a useful life of ten years, and would require $12,000 per year in operating expenses. It has an expected salvage value of $59,000 after ten years. The current disposal value of the old machine is $71,000; if it is kept 10 more years, its residual value would be $19,000.

Required Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced?


Keep Old Machine Total costs $
Should the old machine be replaced? Yes Purchase New Machine $​

Answer 1

To calculate the total costs of keeping the old machine and purchasing a new machine, we need to calculate the costs for each option and compare them.

Option 1: Keep the old machine for 10 more years.

1. Operating expenses for 10 years: $31,000 x 10 = $310,000

2. Residual value after 10 years: $19,000

3. Total cost: $315,000 - $182,000 + $310,000 - $19,000 = $424,000

Option 2: Purchase a new machine.

Initial cost: $222,000

1. Operating expenses for 10 years: $12,000 x 10 = $120,000

2. Salvage value after 10 years: $59,000

3. Total cost: $222,000 + $120,000 - $59,000 = $283,000

Based on the calculations, it is more cost-effective to purchase a new machine, with a total cost of $283,000, compared to the total cost of keeping the old machine for 10 more years, which is $424,000. Therefore, the old machine should be replaced.

Note: In making this decision, other factors such as the reliability, efficiency, and maintenance costs of the old and new machines should also be considered, not just the financial costs.

Step-by-step explanation: