Haggis Enterprises uses a word processing computer to handle its sales invoices.
ID: 2382074 • Letter: H
Question
Haggis 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.
Current Machine
New Machine
If sold now, the current machine would have a salvage value of $5,591. 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 4 years.
Instructions
Complete the analysis to determine if the current machine should be replaced. (Ignore the time value of money. If an amount should be blank, enter a zero. All boxes must be filled to be correct. If amount decreases net income, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Enter all other amounts as positive amounts and subtract where necessary.)
Current Machine
New Machine
Original purchase cost $14,929 $21,920 Accumulated depreciation 6,483 - Estimated operating costs 24,064 19,359 Useful life 4 years 4 years Haggis 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 $5,591. 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 4 years. Complete the analysis to determine if the current machine should be replaced. (Ignore the time value of money. If an amount should be blank, enter a zero. All boxes must be filled to be correct. If amount decreases net income, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Enter all other amounts as positive amounts and subtract where necessary.)Explanation / Answer
Hi,
Please find the answer as follows:
The machine should be Replaced.
Notes:
Operating Cost under both the options is calculated for 4 Years.
Operating Cost (Retain) = 24064*4 = 96256
Operating Cost (Replace) = 19359*4 = 77436
Thanks.
Retain Machine Replace Machine Net Income (Increase/Decrease) Operating costs 96256 77436
18820 Machine cost 0 21920 -21920 Salvage value 0 5591 5591 Total 24064 46870 2491
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