A machine which cost 240 K$ to purchase, has depreciated linearly to 80K$. It ha

Question

A machine which cost 240 K$ to purchase, has depreciated linearly to 80K$. It has a remaining useful life of 4 years, and the disposal cost which stands at 8K$ presently, shall be reduced to 0$ at the end of this time. Available on the market now is a new machine, which will reduce the present operating costs of 150K$ per annum by 40%, whose purchase price is 120K$, useful life is four years, and whose disposal cost will be 2K$ at the end of its useful life. The sales revenue of 300K$ per annum will remain unchanged throughout the time, regardless of the machine used.

Required:

How old is the present machine?

Should this operation retain the old machine, or convert to the new one, if they want to maximize their profits? Show by relevant calculations and by writing income statement.

Explanation / Answer

Cost price of old machine 240 Less: Depreciation charged 80 Carrying Amount 160 Remaining years of life 4 Annual depreciation 40 No of years Depreciation charged = 80/40 = 2 years Solvage   Year Cashflow Disposal Old machine total cashflows 0 -120                 8.00           (112.00) 1 60                60.00 2 60                60.00 3 60                60.00 4 60 -2                58.00 Total             126.00 Year Savings Depreciation Net income 1 60 $              30.00 $          30.00 2 60 $              30.00 $          30.00 3 60 $              30.00 $          30.00 4 60 $              30.00 $          30.00 Total 240.00 120.00 120.00 New machine should be introduced.

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