Question3

A Company is seriously contemplating replacing some old equipment with more modern and efficient equipment. The book value of the old equipment is SR 80000. The new equipment, if purchased, will cost SR 140000. A SR 14000 trade-in allowance will be granted by the seller of the new equipment. The salvage value of the new equipment at the end of its life in 10 years is estimated to be SR 8000. The salvage value of the old asset, if kept, is SR 5000. The operating cost of the old equipment has been averaging around SR 15000 per year. The new equipment is expected to reduce the operating cost to an average of SR 5000 per year. The new equipment, if purchased, will be purchased totally on credit and the total amount of interest that would be paid in 10 years is approximately SR 35000.

Question4

You have been provided the following keep or replace decision information:

	Old Machine	New Machine
Cost Salvage value Trade-in allowance Remaining useful life Labor costs (annual) Repairs and maintenance Utilities Interest rate*	SR 50,000 SR 10,000 SR 15,000 10 years SR 20,000 SR 5,000 SR 1,000 -	SR 100,000 SR 5,000 10 years SR 5,000 SR 6,000 SR 2,000 6%

* Assume installment financing and estimate interest by computing average size of loan over life of machine.

Required:

Determine whether or not the old machine should be replaced.