Question

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 Machine New Machine $24,900 Original purchase cost Accumulated depreciation Estimated annual operating costs Remaining useful life $15,200 $5,900 $24,900 5 years $19,900 5 years If sold now, the current machine would have a salvage value of $10,700. 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 e.g.-45 or parentheses e.g. (45).) Retain Machine Replace Machine Net Income Increase (Decrease) Operating costs New machine cost Salvage value (old) Total The current machine should be

Answer 1

Incremental analysis :- Particulars Retain Mahcine Replace Machine Net Income Increase! (Decrease) 25,000 Operating costs 124,500 (24900*5) 99,500 (19900*5) New machine cost 24,900 (24,900) Salvage value of Old 10,700 10,700 Total 135,200 124,400 10,800 Current machine should be replaced as it leads higher net income of $ 10,800/.