Question
Minecraft Inc. makes building components for several customers. Minecraft Inc. is considering replacing one of the special machines used in the production of a specific
Minecraft Inc. makes building components for several customers. Minecraft Inc. is considering replacing one of the special machines used in the production of a specific product; this machine was purchased eight years ago for $588,000 and has seven years of useful life remaining. The new machine, costing $342,000, is expected to have a useful life equal to the remaining useful life of the current machine and a zero disposal value. Minecraft Inc. incurs annual operating costs equal to $65,000 with the existing equipment, but the new equipment is expected to result in operating costs equal to $32,500. Minecraft Inc. expects to incur additional maintenance expense on the existing machine over the remainder of its seven-year life as follows: $6,000 per year in the first three years, $8,000 per year in years 4 and 5, and $9,000 per year in years 6 and 7. The Accountant is hesitant because the machine is a specialized piece of equipment and therefore, the current one could only be sold for 50% of its current book value of $274,400, resulting in a loss on disposal of $137,200. Required: Ignoring income taxes and time value of money, prepare a quantitative analysis of the best course of action for Minecraft Inc., with regard to the two alternatives. Net savings from buying new machine Which is the best course of action for Minecraft Inc. with regard to the two alternatives? Keep the existing machine Replace the existing machine with the new machine
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