Question

Explain why Twilight Hospital might be reluctant to purchase the new scanner, regardless of the results indicated by the incremental analysis in (b). Use incremental o r replacing el * LO 5), AN Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so go en so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the vol ume of sales in 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 Original purchase cost $15,000 $25,000 Accumulated depreciation $ 6,000 Estimated annual operating costs $25,000 $20,000 Remaining useful life 5 years 5 years If sold now, the current machine would have a salvage value of $6,000. 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. Instructions Prepare an incremental analysis to determine whether the current machine should be replaced.

Answer 1

Solution

	Retain Machine	Replace Machine	Net income Increase (Decrease)
Operating cost	$ 125,000*	$ 100,000	$ 25,000
New machine cost		$ 25,000	-$ 25,000
Salvage value (old)		-$ 6,000	$ 6,000
Total	$ 125,000	$ 119,000	$ 6,000

*Operating cost is for 5 years

The company should replace current machine.