Exercise 7-14 Johnson Enterprises uses a computer to handle its sales invoices.

Question

Exercise 7-14

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 $10,630. 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.

Should the current machine be replaced? (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

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Explanation / Answer

Current machine should be replaced

Particulars Retain Machine Replace Machine Net Income Increase/(Decrease) Annual Operating costs 122850 97650 25200 New Machine Cost 0 25070 -25070 Salvage value (old) 0 10630 10630 Total 122850 83210 10760

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