Ting Young, the Production Manager at Mikocheni Minerals Cutting Technologies Ltd (MMCTL), purchased a cutting machine for the company last year. Six months after the purchase of the cutting machine, Ting learned about a new cutting machine that is more reliable than the machine that she purchased earlier. The following information is available for the two machines:
Category Old Machine New Machine
Acquisition Cost TZS 300,000,000 TZS 360,000,000
Remaining Life 4 Years 4 Years
Salvage Value Now TZS 100,000,000 ___
Salvage Value at the End of 4 Years TZS 4,000,000 TZS 6,000,000
Annual operating costs for the old machine are TZS 140,000,000/=. The new machine will decrease annual operating costs by TZS 60,000,000/=. These amounts do not include any charges for depreciation. MMCTL uses the straight-line depreciation method. These estimates of operating costs exclude rework costs. The new machine will also result in a reduction in the defect rate from the current 5% to 2.5%. All defective units are reworked at a cost of TZS 1,000/= per unit. The company, on average, produces 100,000 units annually.
Required
(i) Should Ting Young replace the old machine with the new machine? Explain, listing
all relevant costs in this decision problem.

 

Old Machine TZS 300,000,000 Category New Machine Acquisition Cost Remaining Life Salvage Value Now Salvage Value at the End of 4 Years TZS 360,000,000 4 Years 4 Years TZS 100,000,000 TZS 4,000,000 TZS 6,000,000