Because of rapidly advancing technology. Chicago Publications Corporation is con
ID: 2820654 • Letter: B
Question
Because of rapidly advancing technology. Chicago Publications Corporation is considering replacing its existing typesetting machine with leased equipment. The old machine, purchased two years ago, has an expected useful life of six years and is in good condition. Apparently, it will continue to perform as expected for the remaining four years of its expected useful life. A four-year lease for equipment with comparable productivity can be obtained for $40,000 per year. The following data apply to the old machine: Original cost Accumulated depreciation Current market value Estimated salvage value $480,000 160,000 190,000 10,000 Required a. Determine the annual opportunity cost of using the old machine. Based on your computations, recommend whether to replace it. b. Determine the total cost of the lease over the four-year contract. Based on your computations, recommend whether to replace the old machine. a. Annual opportunity cost Should the old machine be replaced? b. Total lease cost Should the old machine be replaced?Explanation / Answer
The orginal cost and depreciation are irrelevant here
the annual oppurtunity cost of using old machine=(market-salvage)/years left
=(190000-10000)/4=45000
This is higher than leasing the equipment so it should be replaced
a)450000
b)yes
b)total lease cost over four year period is=4000*4=160000 and the present value of old machine is 190000
since these cost is less we need to replace the machine
b)160000
yes