Question

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Chapter 7: Two problems: Show computation impact on net income) and make a decision on whether to: 1. Retain or replace equipment. E 7-14 & Review exercise 2. Keep or eliminate a division. Do it! 7-6, E 7-15 and MC 14 Retain or Replace an Old Machine New machine $90,000 Purchase cost Accumulated depreciation Disposal (salvage) value if sold now Annual operating expenses Remaining life Old machine $72,000 40,000 15,000 100,000 5 years N/A 90,000 5 years Sales are expected to remain the same regardless of old or new machine. The new machine is expected to have zero salvage value after five years. Should the old machine be retained or replaced?

Answer 1

	Retain old machine	Replace old machine	Increase/Decrease in Income
Cost of new machine	0	90,000	-90,000
salvage value of old machine	0	-15,000	15,000
Operating expense	500,000	450,000	50,000
Total Cost	$500,000	$525,000	-$25,000

Old machine should not be replaced by new machine since if it is replaced, it will result in a loss of $25,000.

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