San Jose Microelectronics is considering the purchase of a new factory machine at a cost of $140,000.

Question:

San Jose Microelectronics is considering the purchase of a new factory machine at a cost of $140,000. The machine would perform a function that is now being performed by hand. The new machine would have a life of 8 years, would produce 14,500 units a year (the current output), and have no salvage value. Direct labor costs would be reduced by $1.00 per unit, and variable overhead costs would also be reduced by $1.00 per unit. Fixed costs other than depreciation would increase by $2,500 per year.
Should the machine be purchased? What is the impact of the decision on net income?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...