E9-11 Use incremental analysis for retaining or replacing equipment decision.
E9-11 Twyla 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 $15,000 $25,000
Accumulated depreciation $ 6,000 —
Estimated annual operating costs $24,000 $18,000
Useful life 5 years 5 years
Original purchase cost $15,000 $25,000
Accumulated depreciation $ 6,000 —
Estimated annual operating costs $24,000 $18,000
Useful life 5 years 5 years
If sold now, the current machine would have a salvage value of $5,000. 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 five years.
Instructions
Should the current machine be replaced?
Should the current machine be replaced?
SOLUTION PREVIEW [The Solution is done in EXCEL TEMPLATE]
EXERCISE
9-11
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Decision
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Net Income
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|||
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Retain
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Replace
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Increase
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||
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Machine
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Machine
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(Decrease)
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||
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Operating costs
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$120,000
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90,000
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$30,000
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5 year period
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File
name:
E9-11-Twyla1.xls File type:
application/vnd.ms-excel Price: $5
