Question

Current Attempt in Progress Cullumber 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 Machine New Machine $25,200 Original purchase cost $14,800 Accumulated depreciation $7,000 $20,000 Estimated annual operating costs $24,700 Remaining useful life 5 years 5 years If sold now, the current machine would have a salvage value of $11,800. 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. Prepare an incremental analysis to determine whether the current machine should 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 eg -45 or parentheses eg (45)) Net Income Replace Increase Retain

Answer 1

	Retain machine	Replace machine	Net income Increase/ (decrease)
Operating cost	$123,500 ($24,700 ×5)	$100,000 ($20,000 ×5)	$23,500
New machine cost		$25,200	($25,200)
Salvage value (old)		$11,800	$11,800
Total	$123,500	$113,400	$10,100

The current machine should be replaced.