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. New Machine $25,300 Original purchase cost Accumulated depreciation Estimated annual operating costs Remaining useful life Current Machine $14,500 $5,500 $24,800 5 years $19,700 5 years If sold now, the current machine would have a salvage value of $9,800. 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 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

	Retain Machine	Replace Machine	Net Income Increase(decrease)
Operating costs	124000	98500	25500
New machine cost	0	25300	-25300
Salvage value(old)	0	-9800	9800
Total	124000	114000	10000
The current machine should be replaced.
Workings:
	Retain Machine	Replace Machine
Operating costs	=24800*5	=19700*5