Morganstern Company is considering the purchase of a new machine. The invoice pr

Question

Morganstern Company is considering the purchase of a new machine. The invoice price of the machine is $170,000, freight charges are estimated to be $4,000, and installation costs are expected to be $6,000. Salvage value of the new equipment is expected to be zero after a useful life of 4 years. Existing equipment could be retained and used for an additional 4 years if the new machine is not purchased. At that time, the salvage value of the equipment would be zero. If the new machine is purchased now, the existing machine would be scrapped. Morganstern's accountant, Diane Gallup, has accumulated the following data regarding annual sales and expenses with and without the new machine.

Answer the following questions: (Ignore income tax effects.)

Explanation / Answer

. . . . . . . . . . . . . . . . . . . . .Old Machine. . . . . . . New Machine

Revenues . . . . . . . . . . . . . . $1,000,000. . . . . . . . $1,200,000

Gross Profit . . . . . . . . . . . . . . .250,000. . . . . . . . . . .336,000

Selling Expenses . . . . . . . . . . .135,000. . . . . . .. . . . 148,500

Administrative Expenses . . . . . .100,000. . . . . . . . . . 113,000

Operating Income . . . . . . . . . . . .15,000. . . . .. . . . . .104,500

104,500 - 15,000 = $89,500 Increase in annual operating income

Compute the payback period for the new machine. (Round to two decimals.)

170,000 / 89,500 = 1.90 years

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