Exercise 12-14 Monty Enterprises uses a computer to handle its sales invoices. L

Question

Exercise 12-14

Monty 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 $8,900. 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? (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 a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Current Machine New Machine Original purchase cost $15,000 $24,800 Accumulated depreciation $5,700 _      Estimated annual operating costs $25,000 $19,700 Remaining useful life 5 years 5 years

Explanation / Answer

Retain Machine Replace Machine Net Income Increase (Decrease) Operating costs 125000 98500 26500 New machine cost 24800 -24800 Salvage value (old) -8900 8900 Total 125000 114400 10600 The current machine should be replaced

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