Question

g A manufacturer is considering replacing a production machine tool. The new machine would cost $3700, have a life of four years, have no salvage value, and save the firm $500 per year in direct labor cost and $200 per year indirect labor costs. The existing machine tool was purchased four years ago at a cost of $4000. It will last four more years and have no salvage value at the end of that time. It could be sold now for $1000 cash. Assume money is worth 8%, and that the difference in taxes, insurance, and so forth, for the two alternatives is negligible. Determine whether or not the new machine should be purchased

Answer 1

The new machine should not be purchased

Step-by-step explanation:

Calculation to determine whether or not the new machine should be purchased

Calculation for the New Machine

EUAC = $3,700 (A/P, 8%, 4) - $500 - $200

EUAC= $3,700 (0.3019) - $700

EUAC=$1,117.03+$700

EUAC= $417.03

Calculation for EXISTING MACHINE

EUAC = $1,000 (A/P, 8%, 4)

EUAC= $1,000 (0.3019)

EUAC= $301.90

Therefore based on the above calculation The new machine should NOT be purchased reason been that it is more COSTLIER than the Existing Machine