Crone Enterprises uses a word processing computer to handle its sales invoices.

Question

Crone Enterprises uses a word processing 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.

Current Machine

New Machine

Original purchase cost $15,715 $21,822
Accumulated depreciation 5,097 -
Estimated operating costs 24,662 19,476
Useful life 5 years 5 years

If sold now, the current machine would have a salvage value of $5,038. 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.

Instructions

Complete the analysis to determine if the current machine should be replaced. (Ignore the time value of money. If an amount should be blank, enter a zero. All boxes must be filled to be correct. If amount decreases net income, use either a negative sign preceding the number eg -45 or parentheses eg (45). Enter all other amounts as positive amounts and subtract where necessary.)


net income
retain machine replace machine increase (decrease)
operating costs
machine cost
salvage value
total

Explanation / Answer

Retain Equipment Replace Equipment Net Income New Machine cost 21,822.00 21,822.00 Operating Costs 24,662.00 19,476.00 (5,186.00) Net Increase in Net Income 16,636.00 Since, Net Income is increasing by $16,636 , it si advisable to replace the equipment. Retain Equipment Replace Equipment Net Income New Machine cost 21,822.00 21,822.00 Operating Costs 24,662.00 19,476.00 (5,186.00) Net Increase in Net Income 16,636.00

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