Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.

Current Machine New Machine Original purchase cost $15,000 $25,000 Accumulated depreciation $ 6,000 Estimated annual operating costs $25,000 $20,000 Remaining useful life 5 years 5 years

If sold now, the current machine would have a salvage value of $6,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years.

Instructions

Prepare an incremental analysis to determine whether the current machine should be replaced.

Use incremental analysis concerning elimination of division.