Machine Replacement Decision A company is considering replacing an old piece of machinery, which...

Question:

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $602,100 and has $348,100 of accumulated depreciation to date, with a new machine that costs $484,700. The old machine could be sold for $64,100. The annual variable production costs associated with the old machine are estimated to be $155,300 per year for eight years. The annual variable production costs for the new machine are estimated to be $99,600 per year for eight years

Differential Analysis

Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)

October 3, 2014

Continue with Old Machine (Alternative 1)

Replace Old Machine (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues:

Proceeds from sale of old machine

$ $ $

Costs:

Purchase price

Variable productions costs (8 years)

Income (Loss)

$ $ $

Prepare a differential analysis dated October 3, 2014, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter zero "0".

Replacement Decision:

The net present value of the organization helps in making decisions regarding the replacement of fixed assets. The organization replaced the fixed assets when it will not give profit to the organization in return. The replacement decision is based on the useful life of the assets.

Answer and Explanation:

Particular Machine Cost Replacement cost Difference
Sale of old machine - 64100 64100
Less: Purchase price - (484700) (484700)
Less: Variable product cost (1242400) (7696800) (445600)
Income (loss) (1242400) 1217400 25000

Working note:

Calculation for variable product cost:

Variable production Cost:

{eq}\begin{align*} & =\text{Estimated}\ \text{cost}\times \text{Number}\ \text{of}\ \text{Years} \\ & \text{=155300}\times \text{8} \\ & \text{=1242400} \end{align*} {/eq}

{eq}\begin{align*} & =\text{New}\ \text{Machine}\ \text{estimated}\ \text{cost}\times \text{Number}\ \text{of}\ \text{Years} \\ & \text{=99600}\times \text{8} \\ & \text{=796800} \end{align*} {/eq}


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