Question

Franklin Moran manages the cutting department of Greene Gibson Company. He purchased a tree-cutting machine on January 1, 2018, for $430,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $90,000 per year. Technological developments resulted in the development of a more advanced machine available for purchase on January 1, 2019, that would allow a 35 percent reduction in operating costs. The new machine would cost $270,000 and have a 4-year useful life and zero salvage value. The current market value of the old machine on January 1 2019, is $210,000, and its book value is $344,000 on that date. Straight-line depreciation is used for both machines. The company expects to generate $233,000 of revenue per year from the use of either machine Required a. Recommend whether to replace the old machine on January 1, 2019 b. Prepare income statements for four years (2019 through 2022) assuming that the old machine is retained. c. Prepare income statements for four years (2019 through 2022) assuming that the old machine is replaced. Complete this question by entering your answers in the tabs below. Required A Rooviren Required B an Required Recommend whether to replace the old machine on January 1, 2019 Replace with New Decision Keep Old Total avoidable costs Should the old machine be replaced on January 1, 20102

Answer 1

A)

Description	Keep Old	Replace with new
Total avoidable costs	$ 134,000	$ 200,000
Should the old machine be replaced on January 1, 2019		Yes

Avoidable costs:

Old machine retained
Loss on old elevator	$    1,34,000

Old machine is replaced
Operating costs (90000*35%)	1,26,000
Depreciation (344000-270000)	$            74,000
Total	$        2,00,000

B)

Income statement when old machine is retained
	2019	2020	2021	2022	Total
Revenu	$        2,33,000	$        2,33,000	$        2,33,000	$        2,33,000	$        9,32,000
Depereciation expense	$            86,000	$            86,000	$            86,000	$            86,000	$        3,44,000
Operating expensne	$            90,000	$            90,000	$            90,000	$            90,000	$        3,60,000
Net Income (loss)	$            57,000	$            57,000	$            57,000	$            57,000	$        2,28,000

C)

Income statement when old machine is replaced
	2019	2020	2021	2022	Total
Revenu	$        2,33,000	$        2,33,000	$        2,33,000	$        2,33,000	$        9,32,000
Depereciation expense	$            67,500	$            67,500	$            67,500	$            67,500	$        2,70,000
Operating expensne	$            58,500	$            58,500	$            58,500	$            58,500	$        2,34,000
Loss on disposal	$        1,34,000	$                     -	$                     -	$                     -	$        1,34,000
Net Income (loss)	$         (27,000)	$        1,07,000	$        1,07,000	$        1,07,000	$        2,94,000