Estimating Cash Flows in a Nonprofit Organization: Edmonton Machine Shop, a government vehicle repair shop, purchased a special purpose machine on January 1 , Year 0. On December 3 1 , Year 0, the company can purchase a more modern machine for $800,000. The new machine would be able to increase production by 25,000 service units per year. Shop management estimates the additional 25,000 service units can be utilized and will not affect the current charge of $8 per service unit. Edmonton pays no taxes. Other information related to the two machines is as follows:

Required:

a. Complete the following schedule of differential costs associated with the potential purchase of the new machine.

b. Based on a discount rate of 20 percent, recommend whether or not to purchase the new machine.

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Remaining useful life Book value on December 31, Year 0 Salvage value on December 31, Year 0. Salvage value on December 31, Year 5 Annual straight-line depreciation Revenue per service unit Old Machine 5 years $250,000 200,000 -0- 50,000 8.00 New Machine 5 years $800,000 n.a. 100,000 140,000 8.00 Variable cost per unit 4.00 4.75 Fixed cost per year (does not include depreciation on machine) 70,000 70,000 Cost to install new machine 8,000 Expected service units performed per year 75,000 100,000