Question

Exercise 20-14 Johnson Enterprises uses a 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 New Machine Machine Original purchase cost $14,600 $25,300 Accumulated depreciation $6,400 Estimated annual operating costs $24,900 $19,500 5 years Remaining useful life 5 years If sold now, the current machine would have a salvage value of $8,800. 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. Should the current machine be replaced? (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

Answer

	Retain Machine	Replace Machine	Net Income increase (decrease)
Operating costs [Annual cost x 5 years]	$124,500	$97,500	$27,000
New machine cost	$0	$25,300	($25,300)
Salvage value (old)	$0	($8,800)	$8,800
Total	$124,500	$114,000	$10,500

• The current machine SHOULD BE REPLACED, as replacing the same will lead to $ 10500 increase in Net Income in 5 years.