Exercise 20-14 Johnson Enterprises uses a computer to handle its sales invoices.

Question

Exercise 20-14 Johnson 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.

If sold now, the current machine would have a salvage value of $10,120. 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.

Prepare an incremental analysis. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Should the current machine be replaced?

Current Machine New Machine Original purchase cost $15,290 $24,940 Accumulated depreciation $  5,600 _ Estimated annual operating costs $24,730 $19,760 Useful life 5 years 5 years

Explanation / Answer

Answer:

                                                   Retian Machine    Replace Machine Net Income ( + or - )

Operating Cost     ($ 24730 * 5) = $ 123,650      ($19,760 * 5) = $ 98,800    $ 24,850        

New Machine Cost (depr.)                       0                                     $ 24,940                         - $ 24,940

Salvage Value ( OLD )                             0                                    $ 10,120                          $ 10,120

TOTAL                                          $ 123,650                             $ 113,620                          $ 10,030

The Current Machine should be Replaced. the Incremental analysis shows that net income for the five - year period will be $ 10,030 higher by replacing the current machine.

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