Question
Assume that a company is choosing between two alternativeskeep an existing machine or replace it with a machine. The costs associated with the two alternatives
Assume that a company is choosing between two alternativeskeep an existing machine or replace it with a machine. The costs associated with the two alternatives are summarized as follows:
| Existing Machine | New Machine | |
|---|---|---|
| Purchase cost (new) | $ 15,000 | $ 26,000 |
| Remaining book value | $ 6,000 | |
| Overhaul needed now | $ 5,000 | |
| Annual cash operating costs | $ 10,500 | $ 7,000 |
| Salvage value (now) | $ 2,000 | |
| Salvage value (eight years from now) | $ 1,000 | $ 6,000 |
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. If the company overhauls its existing machine, it will be usable for eight more years. If it buys the new machine, it will be used for eight years. Based on a net present value analysis with a discount rate of 21%, what is the financial advantage (disadvantage) of replacing the existing machine with a new machine?
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Financial Accounting The Impact On Decision Makers An Alternative To Debits And Credits
Authors: Gary A. Porter, Curtis L. Norton
3rd Edition
0030335639, 978-0030335631
