Crone Enterprises uses a word processing computer to handle its sales invoices.

Question

Crone 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
Original purchase cost $15,190 $21,570
Accumulated depreciation 5,830 -
Estimated operating costs 24,370 19,440
Useful life 5 years 5 years

If sold now, the current machine would have a salvage value of $5,940. 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 5 years.

Complete the analysis to determine if the current machine should be replaced. (Ignore the time value of money. If an amount is blank enter 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the amount, e.g. -45 or parenthesis, e.g. (45). Enter all other amounts as positive amounts and subtract where necessary.)

Retain Machine Replace Machine Net Income
Increase
(Decrease)
Operating costs
New machine cost (Depr.)
Salvage value (old)
Total $ $ $

The current machine should be .

Explanation / Answer

Retain

Replace

NI increase/(decrease)

Operating costs

0

21570

(21570)

New Machine cost

121,850

97,200

24,650

Salvage Value (old)

0

5940

5940

Total

121,850

112,830

9020

They should replace the equipment

Retain

Replace

NI increase/(decrease)

Operating costs

0

21570

(21570)

New Machine cost

121,850

97,200

24,650

Salvage Value (old)

0

5940

5940

Total

121,850

112,830

9020

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