John Smith is the director of an engineering department of a local government and is considering the replacement of a significant piece of machinery used to resurface roads. The new machine is easier to maintain (current one that was purchased 2 years ago requires regular maintenance to keep it going) and is more energy efficient. In summary, John is deciding on whether to (1) keep the existing machine for the next 5 years or (2) sell the existing machine a purchase a new machine for use for the next 5 years.

Existing New Machine Machine Cost $1,200,000 $2,000,000 Estimated residual value at end of useful life $200,000 $500,000 Current age 2 years new Running costs (per year) $200,000 $150,000 Annual depreciation $140,285 $300,000 Estimated life at time of original purchase 7 years 5 years Current market value price $600,000 $2,000,000