which option should the company go with :

(1) continue to operate the old machine purchased four years ago or

(2) sell it and purchase the new machine.

Assume that ABX Company is considering the purchase of a newer, more efficient yogurtmaking machine. If purchased, it would require the new machine on January 2, year 1. ABX expects to sell 600,000 gallons of yogurt in each of the next five years at a $2 per gallon selling price. ABX has two options: (1] continue to operate the old machine purchased four years ago or [2] sell it and purchase the new machine. The following information has been prepared to help decide which option is more desirable. Old Machine New Machine Original cost of machine at acquisition 5 1,600,000 52,000,000 Useful life from date of acquisition 3' years 5 years Expected annual cash operating expenses: Variable cost per gallon 51.20 51.00 Total fixed cash costs 5 400,000 5 150,000 Depreciation is as follows: Tax Age of Equip Depreciation lira-Hrs} Rate 1 15% 2 25% 3 20% 4 20% 5 20% Estimated cash value of machines follows: Old Machine New Machine January 2, Year 1 S 400,000 $ 2,000,000 December 31, Year 3 $200,000 0 December 31, Year 5 0 $500,000 ABX is subject to a 4031': income tax rate on all income. Assume that tax depreciation is calculated without regard to salvage value. Use an aftertax discount rate of 10%