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Given: At their factory ACME Corp. are using a machine which has a remaining useful life of 4 years, and whose present book value
Given: At their factory ACME Corp. are using a machine which has a remaining useful life of 4 years, and whose present book value is 120 K$. The present disposal value for this machine is 70 K$, and its disposal value in four years' time is expected to be 20 K$. A sales agent offers another machine to Acme. This new machine has a sales price of 560 K$, has a useful life of four years, and its disposal value in four years' time is expected to be 10 K$. The new machine is expected to reduce present variable production costs by 10%. The present annual accounting data for ACME is presented below, and is not expected to change in the next few years. There are no other costs. Accounting Data (All values are in K$pa) Raw material : 5,000 Wages Salaries : 600 Sale Commissions : : 3,000 800 Rents : 220 Insurance premiums: 25 Advertising : 90 Income tax : Other taxes : 165 Interest payments: 40% of pre-tax profit 100 Sales revenue : 16,000 Required: Decide whether the management should continue with the old machine, or revert to the new machine. (Hint: Support your decision by writing an income statement over four years for either scenario. This statement should be written using the contribution margin technique, and should stop at the EBIT line. You will not merit any grades if this Income Statement is missing)
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