Question

Campbell Moran manages the cutting department of Greene Fanning Company. He purchased a tree-cutting machine on January 1, year 2, for $390,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $87,000 per year. Technological developments resulted in the development of a more advanced machine available for purchase on January 1, year 3, that would allow a 25 percent reduction in operating costs. The new machine would cost $210,000 and have a 4-year useful life and zero salvage value. The current market value of the old machine on January 1, year 3, is $220,000, and its book value is $312,000 on that date. Straight-line depreciation is used for both machines. The company expects to generate $230,000 of revenue per year from the use of either machine. Required a. Recommend whether to replace the old machine on January 1, year 3. b. Prepare income statements for four years (year 3 through year 6) assuming that the old machine is retained. c. Prepare income statements for four years (year 3 through year 6) assuming that the old machine is replaced. Complete this question by entering your answers in the tabs below. Required A Required B Required C Recommend whether to replace the old machine on January 1, year 3. Decision Keep Old Replace With New Total avoidable costs Should the old machine be replaced on January 1, year 3? < Required A Required B

Answer 1

A Decision Total Avoidable costs Should the old machine be replaced on Keep old Replace with New $ 92000 $123750 Yes January1. Year 3 ? EVE Note: Avoidable costs: i old Machine Retained 10ss on old mockine ($312000 - $ 220000) (ii) old machine Replaced Operating cost 18.7000 x 25.1.) Depreciation 1 312000 - 210000) $92000 $ 21950 $ 10 2000 To tal $123450

B. that Income statements for four years (Year 3 through Year 6) assuming Old machine Ps retained. Total Revenue Depreciation Expense operating Expense Year 3 Yeary Years Year6 $ 23000d$ 230000 $230000 $230000 $920000 478000)4 78000)*78000) $ 78000) 14 31 2000) lis 87000)|487000)|(487000) (4348000) $65000 $65000/$65000 65000 11$87000) Net Income (tors) $260000 C. Income Statements for four years (Year 3 through Years) assuming that old machine is replaced. Year 3 Year4 Years Year6 Total Revenue $230000 $ 230000 $ 230000 $ 230000 $920000 $S2500 $S2500 $ $ 2 500 $S2500 $ 210000 Depreciation Expense Operating Expense loss on Disposal $65250 &65250 $65250 $ 65250 $ 261000 $92000 $102000 $ 20250 $112250 $112 250 $112250 $ 357000 Net Income (loss) Note 1. Cost of new machine = Useful life $ 210000 = 4 years Depreciation each year Cost $ 210000 Usefu lite 4 operating expense - $ 87000 - 254. Tedullim in obey ating Expense = $87000 25.1.x 87000 87000 $21750 $65250 $52.500 each year 2. 3. loss on Disposal Book value - Mauket value - $3120.00 - $ 220000 = $ 92.000