Background:

As the senior accountant at Active Quality Sportswear (AQS), which manufactures sport attire for men, women, youth, and children, you are often asked to prepare various financial analysis necessary for decision making. Jacob Jones, the controller, asked you to evaluate whether a piece of factory equipment should be replaced or kept.

The old piece of factory equipment was purchased four years ago for $850,000. Over the last four years, AQS has allocated depreciation based on the straight-line method. The expected salvage value is $25,000. The current book value of the factory equipment is $520,000. The operating expenses total approximately $40,000 a year. It is estimated that the residual value (market value) of the old machine is $300,000.

The controller is contemplating whether to replace the piece of factory equipment. The replacement factory equipment would consist of a purchase price of $400,000, a useful life of eight years, salvage value of 20,000, and annual operating costs of $25,000.

Your first paragraph would be an introduction paragraph of what the memo is about. Next, you will want to consider the equipment replacement decision. To add clarity to your discussion, you can insert a table comparing the old equipment to the new equipment. In evaluating the relevant costs, what does your analysis show? Do you recommend that the equipment be replaced or kept ongoing for the next eight years? Why or why not?