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The old piece of factory equipment was purchased four years ago for $850,000. Over the last four years, AQS has allocated depreciation based on the
The old piece of factory equipment was purchased four years ago for $850,000. Over the last four years, AQS has allocated depreciation based on the straight-line method. The expected salvage value is $25,000. The current book value of the factory equipment is $520,000. The operating expenses total approximately $40,000 a year. It is estimated that the residual value (market value) of the old machine is $300,000.
The controller is contemplating whether to replace the piece of factory equipment. The replacement factory equipment would consist of a purchase price of $400,000, a useful life of eight years, salvage value of 20,000, and annual operating costs of $25,000.
providing a table evaluating the relevant costs, what does your analysis show? Do you recommend that the equipment be replaced or kept ongoing for the next eight years? Why or why not?
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