Twyla Enterprises uses a computer to handle its sales invoices. Lately, business

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

New

Machine

Machine

5 years

5 years

3 years

5 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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