Lay Enterprises uses a word processing computer to handle its sales invoices. La
ID: 2359971 • Letter: L
Question
Lay Enterprises uses a word processing computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.
If sold now, the current machine would have a salvage value of $7,160. 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 after4years.
Prepare the incremental analysis for the decision to retain or replace the machine. (If an amount reduces the net income for Increase (Decrease) column then enter with a negative sign preceding the number e.g.-15,000 or parenthesis, e.g. (15,000). Enter all other amounts in all other columns as positive and subtract where necessary.)
Should the current machine be replaced? (Ignore the time value of money.)
The current machine should be.REPLACE OR RETAINED
Current Machine
New Machine Original purchase cost
$14,500
$21,910
Accumulated depreciation
6,210
Estimated operating costs
24,980
19,060
Useful life
4 years
4 years
Explanation / Answer
Retain Machine Replace Machine Net Income Increase(Decrease) op. costs 12,5260 23,2514 11,7747 new machine 2,514 7,871 5,624 cost slavage value 66254 41524 19852 Total 20,9528 35,2514 36,2514
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