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 9 more years, its residual value would be $10,000.

Required:
a. Calculate the total costs in keeping the old machine and purchase a new machine.
Old machine New Machine
Total cost :
b. Should the old machine be replaced?
Yes
No

Answer 1

Answer: See explanation

Step-by-step explanation:

a. Calculate the total costs in keeping the old machine and purchase a new machine.

The total costs in keeping the old machine will be:

Opportunity cost = $85000 - $10000 = $75000

Add: Opening costs = 30000 × 9 = $270000

Total cost = $75000 + $270000 = $345000

The total cost in buying a new machine will be:

Opportunity cost = $240000 - $65000 = $175000

Add: Opening costs = 13000 × 9 = $117000

Total cost = $175000 + $117000 = $292000

b. Should the old machine be replaced?

Yes. The old machine should be replaced because it's cost is higher.