Oscar Co. is contemplating the replacement of an old machine with a new one. The

Question

Oscar Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered:

  Old Machine         New Machine

Cost                                      $250,000               $500,000

Accumulated Depreciation   75,000                   -0-

Remaining useful life           10 years                -0-

Useful life                             -0-                          10 years

Annual operating costs        $200,000               $150,500

If the old machine is replaced, it can be sold for $80,000.

The net advantage (disadvantage) of replacing the old machine is

Explanation / Answer

Differential analysis :

80000

The net advantage (disadvantage) of replacing the old machine is (370500)

Old machine New machine Annual operating cost -200000 -150500 New machine cost 0 -500000 Salvage value of old machine 0

80000

Total -200000 -570500

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