Question

OTCT yservans Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing. Current Machine New Machine Original purchase cost $15,500 $25,100 Accumulated depreciation $5,900 Estimated annual operating costs $24,900 $19,800 Remaining useful life 5 years 5 years If sold now, the current machine would have a salvage value of $10,300. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years Prepare an incremental analysis to determine whether the current machine should be replaced. (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.s. -45 or parentheses e.g. (45).) Net Income Retain Replace Machine Increase Machine (Decrease) Operating costs $ $ New machine cost Salvage value (old) Total $ $ The current machine should be

Answer 1

	Retain machine	Replace machine	Net income increase(decrease)
Operating costs	124500	99000	25500
New machine cost	0	25100	-25100
Salvage value(old)	0	-10300	10300
Total	124500	113800	10700
The current machine should be replaced
Workings:
	Retain machine	Replace machine
Operating costs	=24900*5	=19800*5