Santosh Plastics Inc. purchased a new machine one year ago at a cost of $105,000. Although the machine operates well and has five more years of operating life, the president of Santosh Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market.

The new machine costs $157,500 and is expected to slash the current annual operating costs of $73,500 by two-thirds. The new machine is expected to last for five years, with zero salvage value at the end of five years. The current machine can be sold for $17,500 if the company decides to buy the new machine. The company uses straight-line depreciation.

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

Book value of the old machine

87,500

Less: Salvage value

17,500

Net loss from disposal

70,000

Even though the new machine looks good, said the president, we cant get rid of that old machine if it means taking a huge loss on it. Well have to use the old machine for at least a few more years.

Sales are expected to be $367,500 per year, and selling and administrative expenses are expected to be $220,500 per year, regardless of which machine is used.

3. What is the minimum saving in annual operating costs that must be achieved in order for the president to consider buying the new machine?