Question

Zark Company relies heavily on a copier machine to process its paperwork. Recently the copy clerk has not been able to process all the necessary copies within the regular work week.Management is considering updating the copier machine with a faster model.Current Copier New ModelOriginal Purchase Cost $8,000 $15,000Accumulated Depreciation 6,000 0Estimated annual operating costs 6,500 3,000Useful life 5 years 5 years

If sold now, the current copier would have a salvage value of $1,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after five years. Prepare an analysis to show whether the company should retain or replace the machine.

Answer 1

Preparation of analysis is shown below:-

Step-by-step explanation:

Particulars Retain Replace Net income

machine machine Retain Machine or Replace

Machine Increase (Decrease)

Operating costs $32,500 $15,000 $17,500

New machine cost 0 $15,000 ($15,000)

Salvage value 0 ($1,000) $1,000

Total $32,500 $29,000 $3,500

Working note

Operating cost = $6,500 × 5

= $32,500

Operating cost = $3,000 × 5

= $15,000

As we can see that the machine should able to replace as the $3,500 would be saved in total cost