Santosh Plastics Inc., purchased a new machine one year ago at a cost of $96,000. 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 $144,000 and is expected to slash the current annual operating costs of $67,200 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 $16,000 if the company decides to buy the new machine. The company uses straight-line depreciation.

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

Book value of the old machine

Less: Salvage value

Net loss from disposal

$80,000 16,000

$64,000

"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."