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 gaod that it takes an extra 3 hours per night, plus avery third Saturday, to keep up with the volume of sales invaices. Management is considering updating its computer with a faster model that would climinate all of the overtime pracessing. Current Machin New Machine Original purchase cost $15,300 $6,200 $24,800 5 years $25,100 $19,800 5 years Estimated annual operating costs Remaining useful life If sold now, the current machine would have a salvage value of $10,800. If operated for the remainder of its useful life, the current machine would have zero salvage velue. The new machine is expected to heve zero salvege value after 5 years. Should the current machine be replaced? (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either negative sign preceding the number e.g.-45 or parentheses e.g. (45).) Net Income Retain Machine Replace Machine (Decrease) Operating costss New mathine cost Salvage value (old) Total The current mechine should be

Explanation / Answer

Retain Machine Replace Machine Net Income Increase (Decrease) Operating Cost 24,800 19,800 5,000 Saving in Cost New Machine Cost 25,100 -25,100 New Machine Cost Salavage Value (Old) -10,800 10,800 Old Machine Sale Value Total 24,800 34,100 -9,300 Replacing the Machine will cost Additional 9300 Cost. Hence, The Current Machine should be Retained

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