. Relevant Costs. Aussie Auto Wash Company has just installed a special machine for washing cars in...
Question:
. Relevant Costs. Aussie Auto Wash Company has just installed a special machine for washing cars in its Perth outlet. The machine cost A \(\$ 20.000\). Its operating costs, based on a yearly volume of 100,000 cars, total A \(\$ 15,000\), exclusive of depreciation. After the machine has been used one day, a salesperson offers a different machine that promises to do the same job at a yearly operating cost of \(A \$ 9,000\), exclusive of depreciation. The new machine will cost \(A \$ 24,000\), installed. The "old" machine is unique and can be sold outright for only \(A \$ 8,000\), less \(A \$ 2,000\) removal cost. The old and new machines will have a 4 -year useful life and no residual value. Sales, all in cash, will be A \(\$ 150,000\) per year; and other cash expenses will be A \(\$ 110,000\) annually, regardless of this decision.
\section*{Required:}
1. Ignore taxes. Calculate net income for each of the four years assuming that the new machine is not purchased and then assuming that it is purchased. Sum the net incomes for the four years for each alternative. What should be done?
2. Ignore taxes, and consider the time value of money. If a 15 percent return on investment is desired, what should be done?
Step by Step Answer:
Managerial Accounting
ISBN: 9780538842822
9th Edition
Authors: Harold M. Sollenberger, Arnold Schneider, Lane K. Anderson