Murl Plastics Inc. purchased a new machine one year ago at a cost of $30,000. Although the machine operates well, the president of Murl Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine would slash annual operating costs by two-thirds, as shown in the comparative data below:

Present machine

new machine

Purchase cost new

$30,000

$45,000

Estimated useful life new

6years

5 yeaars

Annual operating costs

$21,000

$7,000

Annual straight-line depreciation

5,000

99,000

Remaining book value

25,000

-

salvage value now

5,000

-

salvage value in 5 years

0

0

In trying to decide whether to purchase the new machine, the president has prepared the following analysis:

Book value of the old machine

$25,000

Less: salvage value

5,000

Net: loss from disposal

$20,000

"Even though the new machine looks good," said the president, "we can't get rid of that old machine if it means taking a huge loss on it. We'll have to use the old machine for at least a few more years."

Sales are expected to be $100,000 per year and selling and administrative expenses are expected to be $63,000 per year, regardless of which machine is used.

Required:

1.Prepare a summary income statement covering the next five years, assuming the following:

a.The new machine is not purchased

b.The new machine is purchased

2.Compute the advantage of purchasing the new product using relevant cost.