Twyla Enterprises uses a computer to handle its sales invoices. Lately, business
ID: 2379254 • Letter: T
Question
Twyla Enterprises uses a 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.
Current Machine New Machine
Original purchase cost $15,000 $25,000
Accumulated depreciation $ 6,000 ------
Estimated annual operating costs $24,000 $18,000
Useful life 5 years 5 years
If sold now, the current machine would have a salvage value of 5,000. 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.
Should the current machine be replaced?
Explanation / Answer
Current machine should be replaced with new machine because:
Current
New
Machine
Machine
Purchase Cost
$15000
$25000
Accumulated Depreciation
$6000
Annual Operating Cost
$24000
$18000
Useful life
5 years
5 years
Remaining life
3 years
5 years
Depreciation per Year
$3000
$5000
(Cost of the asset / Life time)
Benefits / Reasons for New Machine
1. We can save operating cost for 5 years(24000 - 18000 *5) = $30000
2. We can eliminate overtime processing
3. If we purchase new machine, we can sale & get a solvage value of current machine $5000
4. After three years we have to purchase another new machine,
because present machine remaining life is only 3 years.
Current
New
Machine
Machine
Purchase Cost
$15000
$25000
Accumulated Depreciation
$6000
Annual Operating Cost
$24000
$18000
Useful life
5 years
5 years
Remaining life
3 years
5 years
Depreciation per Year
$3000
$5000
(Cost of the asset / Life time)
Benefits / Reasons for New Machine
1. We can save operating cost for 5 years(24000 - 18000 *5) = $30000
2. We can eliminate overtime processing
3. If we purchase new machine, we can sale & get a solvage value of current machine $5000
4. After three years we have to purchase another new machine,
because present machine remaining life is only 3 years.
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