I really need a push on this question. Can somebody kindly help me with this one

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I really need a push on this question. Can somebody kindly help me with this one? Thanks! Equipment replacement decisions and performance evaluation. Bob Moody manages the Knoxville plant of George Manufacturing. He has been approached by a representative of Darda Engineering regarding the possible replacement of a large piece of manufacturing equipment that George uses in its process with a more efficient model. While the representative made some compelling arguments in favor of replacing the 3-year old equipment, Moody is hesitant. Moody is hoping to be promoted next year to manager of the larger Chicago plant, and he knows that the accrual-basis net operating income of the Knoxville plant will be evaluated closely as part of the promotion decision. The following information is available concerning the equipment replacement decision:  The historic cost of the old machine is $300,000. It has a current book value of $120,000, two remaining years of useful life, and a market value of $72,000. Annual depreciation expense is $60,000. It is expected to have a salvage value of $0 at the end of its useful life.  The new equipment will cost $180,000. It will have a two-year useful life and a $0 salvage value. George uses straight-line depreciation on all equipment.  The new equipment will reduce electricity costs by $35,000 per year, and will reduce direct manufacturing labor costs by $30,000 per year. For simplicity, ignore income taxes and the time value of money. Required 1. Assume that Moody

Explanation / Answer

1.

Savings in expenses = 35,000+30,000=65,000 dollars per annum

Increase in depreciation = 90,000 - 60,000 = 30,000 dollars per annum

Loss on sale og old machine = 120,000-72,000=48,000 dollars for 1st year.

So net profit will decrease by 13,000(48,000+30,000-65000) in first year and will increase by 35,000(65,000-30,000) in 2nd year.

Moody wants promotion. So he will not accept the proposal because there is decrease in profit for the next year on which his promotion depends.

2.

According to company interest it is better to relace the machine because the overal profit will be 35,000-13,000 = 22,000 dollars.

Factors to be considered: 1. Time value of money 2. Tax savings

3.

Moody can buy the new machine if there will be no decrese in profit for the first year. For that depreciation should be less by 13,000. Required depreciation = 90,000-13,000 = 77,000

So Reqiered price will be less than or equal to 77,000*2 years = 154,000 dollars.

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