ABC industries Ltd. has an aging machine which is outdated, the finance manager is aware of the more efficient machine that is already in use in the market, he requests the cost accountant to furnish him with relevant data on operational cost for the existing machine. He is provided with the following information, if the existing machine can continue in operation for the next 10 years the operating and maintenance costs will be $30,000 alternatively it could be sold and fetch $15,000 now and be replaced with a new model machine which costs $5,000, but has reduced operating and maintenance costs at $2,500 per year.This machine could be sold at the end of its 10 year for $5,000. The third possibility is to spend $2,000 for an immediate overhaul of the odd machine which will improve its efficiency for the rest of its life that operating and maintenance costs become 265,000 thereafter. The old machine will have a salvage value of zero in ten years time whether or not its overhauled. ABC industries Ltd. requires a return on investment of 10% on projects in this risk class.
Required:
Evaluate the various alternatives and advice on the best course of action. (12 Marks)