Exercise 6-18A Asset replacement decision LO 6-5 A machine purchased three years
ID: 2605313 • Letter: E
Question
Exercise 6-18A Asset replacement decision LO 6-5 A machine purchased three years ago for $302,000 has a current book value using straight-line depreciation of $189,000; its operating expenses are $37,000 per year. A replacement machine would cost $221,000, have a useful life of nine years, and would require $9,000 per year in operating expenses. It has an expected salvage value of $78,000 after nine years. The current disposal value of the old machine is $87,000; if it is kept 9 more years, its residual value would be $14,000. Required Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced? Answer is complete but not entirely correct. Purchase Machine Machine $ 319,000 137,000 Keep Old New Total costs Should the old machine be replaced? YesExplanation / Answer
Answer:
A)
Calculation of the total cost for is as under keeping the old machine and purchase a new machine
Old
Machine
New
Machine
Opportunity cost
73000
(87000-14000)
Purchase value less salvage amount
143000
(221000-78000)
Operating cost
333000
81000
(37000*9)
(9000*9)
Total Cost
406000
224000
As we can see that cost of keeping the old machine is higher then the purchase a new machine so company should purchase a new machine
Should the old machine be replaced
Yes
Old
Machine
New
Machine
Opportunity cost
73000
(87000-14000)
Purchase value less salvage amount
143000
(221000-78000)
Operating cost
333000
81000
(37000*9)
(9000*9)
Total Cost
406000
224000