Question

Bach Company paid $120,000 to purchase a machine on January 1, 2012. During 2014, a technological breakthrough resulted in the development of a new machine that costs $150,000. The old machine costs $50,000 per year to operate, but the new machine could be operated for only $18,000 per year. The new machine, which will be available for delivery on January 1, 2015, has an expected useful life of four years. The old machine is more durable and is expected to have a remaining useful life of four years. The current market value of the old machine is $40,000. The expected salvage value of both machines is zero.

Required:
a.
Calculate the total avoidable costs in keeping the old machine and buy a new machine.



b. Should the machine be replaced?
Yes
No

Answer 1

Step-by-step explanation:

a) calculate the total avoidable cost in keeping the old machine and buy a new machine:

PARTICULARS KEEP OLD BUY NEW

AMOUNT($) AMOUNT($)

Opportuinty cost of buying 40,000

the old machine

Purchase price 150,000

Operating expenses

(50,000 × 4 years) 200,000

Operating expenses

18,000 × 4 years) 72,000

TOTAL AVOIDABLE COST 240,000 222,000

b)Decision:

Since the cost of operating the new machine is lower,it should be replaced