Question

Murl Plastics Inc. purchased a new machine one year ago at a cost of $72,000. Although the machine operates well, the president of Murl Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine would slash annual operating costs by two-thirds, as shown in the comparative data below: Purchase cost new Estimated useful life new Annual operating costs Annual straight-line depreciation Remaining book value Salvage value now Salvage value in five years Present Machine $72,000 6 years $50,400 12,000 60,000 12,000 Proposed New Machine $108,000 5 years $ 16,800 21,600 In trying to decide whether to purchase the new machine, the president has prepared the following analysis: Book value of the old machine Less: Salvage value $60,000 12,000 Net loss from disposal $48,000 "Even though the new machine looks good," said the president, "we can't get rid of that old machine if it means taking a huge loss on it. We'll have to use the old machine for at least a few more years." Sales are expected to be $252,000 per year, and selling and administrative expenses are expected to be $ 151,200 per year, regardless of which machine is used.

Answer 1

1.

	5 Years Summary
	Keep Old Machine	Buy New Machine	Difference
Sales	1260000	1260000	0
Selling and administrative expenses	756000	756000	0
Operating costs	252000	84000	168000
Depreciation-new machine	0	108000	-108000
Depreciation of old machine, or loss write-off	60000	60000	0
Salvage value-old machine	0	-12000	12000
Total expenses	1068000	996000	72000
Net operating income	192000	264000	-72000

2. Net advantage of purchasing the new machine $72000