Three years ago, the Oak Street TCBY bought a frozen yogurt machine for $8,000. A salesman has just suggested to the TCBY manager that she replace the machine with a new, $12,500 machine. The manager has gathered the following data: 

1. Compute the difference in total costs over the next five years under both alternatives; that is, keeping the original machine or replacing it with the new machine. Ignore taxes. 

2. Suppose the Oak Street TCBY manager replaces the original machine. Compute the “loss on disposal ?of the original machine. How does this amount affect your computation in number 1? Explain.

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Old Machine New Machine $8,000 $12,500 Original cost Useful life in years Current age in years Useful life remaining in years 5 3 5 5 Not acquired yet Not acquired yet Not acquired yet Accumulated depreciation $3,000 $5,000 Book value Disposal value (in cash) now $2,000 Disposal value in five years Annual cash operating cost $4,500 $3,000