Tat Beng Pte Ltd (TBPL) is considering the purchase of a new drilling machine, model RD2021K, which is expected to substantially increase productivity over AD0001K, the machine currently in use.

The AD0001K was acquired 8 years ago for $120,000 and is being depreciated over 10 years expected useful life with an estimated salvage value of $20,000. The engineering department proposed a major overhaul at an estimated cost of $100,000 at the end of AD0001K's original useful life. This overhaul will extend the machine's useful life by another three years. The overhauled machine will be depreciated using straight-line depreciation with no salvage value. The overhaul is expected to improve the machine's operating efficiency by approximately 20%. No other operating conditions will be affected by the overhaul.

The cost of purchase for RD2021K, including installation, testing and commissioning, and training is expected to be $240,000. The RD2021K will be depreciated using the straight-line method with no salvage value. New technology will most likely render RD2021K obsolete in five years.

Variable operating cost for either machine is the same: $10 per hour (cash-based). Other relevant data are as follows:

CoursHeroTranscribedText: AD0001K RD2021K Production volume (per annum) 10.000 10,000 Machine hours 8,000 4,000 Selling price per unit $100 $100 Variable manufacturing cost - cash based (not including $40 $40 machine hours) Other annual cash expenses (tooling and supervising) $95,000 $55.000 Disposal value - today $40,000 $- Disposal value - in five years $- $50,000