Question
Morris Timber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable and results in a significant amount of downtime
Morris Timber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines:
Old Machine New Machine
Original purchase cost $340,000 $370,000
Accumulated depreciation 230,000
Estimated life 5 years 5 years
It is estimated that the new machine will produce annual cost savings of $85,000. The old machine can be sold to a scrap dealer for $8,000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives.
Instructions
Determine whether the company should purchase the new machine.
Solution
| Retain | Replace | Net Income increase(decrease) |
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The company should ------------ because---------------------------------------------------------------------------------------------------------
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