Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Standard Machine Parts Ltd. makes specialized machine parts for several customers, all of whom are major manufacturers. Standard is considering replacing one of the special
Standard Machine Parts Ltd. makes specialized machine parts for several customers, all of whom are major manufacturers. Standard is considering replacing one of the special machines used in the production of a specific product; this machine was purchased eight years ago for $750,000 and has seven years of useful life remaining. The new machine, costing $400,000, is expected to have a useful life equal to the remaining useful life of the current machine and a zero disposal value. Standard incurs annual operating costs equal to $72,000 with the existing equipment, but the new equipment is expected to result in operating costs equal to $36,000. Standard expects to incur additional maintenance expense on the existing machine over the remainder of its seven-year life as follows: $5,000 per year in the first three years, $7,000 per year in years 4 and 5, and $9,000 per year in years 6 and 7. Despite the significant reduction in annual operating costs, as well as the increase in maintenance costs, the controller is hesitant because the machine is a specialized piece of equipment and, due to the limited second-hand market for such a machine, the current one could only be sold for 50% of its current book value of $350,000, resulting in a loss on disposal of $175,000. Required: Ignoring income taxes and time value of money, prepare a quantitative analysis of the best course of action for Standard, with regard to the two alternatives
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started