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
Original purchase cost		$15,500			$25,100
Accumulated depreciation		$5,900			_
Estimated annual operating costs		$24,900			$19,800
Remaining useful life		5 years			5 years

If sold now, the current machine would have a salvage value of $10,300. 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		$enter operating costs in dollars		$enter operating costs in dollars		$enter operating costs in dollars
New machine cost		enter the new machine cost in dollars		enter the new machine cost in dollars		enter the new machine cost in dollars
Salvage value (old)		enter the salvage value of the old machine		enter the salvage value of the old machine		enter the salvage value of the old machine
Total		$enter a total of the three previous amounts		$enter a total of the three previous amounts		$enter a total of the three previous amounts

The current machine should be select an option                                                          retainedreplaced.

Answer 1

Operating Costs New machine costs Salvage value (old) Total Retain Machine Replace Machine Net Income Increase (Decrease) $ 124,500 $ 99,000 $ 25,500 $ $ 25,100 $ (25,100) $ $ (10,300||$ 10,300 $ 124,500 $ 113,800 $ 10,700 The current machine should be replaced Working Notes: Operating Costs : Retain Machine = $24,900*5 = $124,500 Replace Machine = $19,800*5 = $99,000