Question

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 $15,000 $25,200 Accumulated depreciation $5,900 _ Estimated annual operating costs $25,000 $19,500 Remaining useful life 5 years 5 years If sold now, the current machine would have a salvage value of $8,100. 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. Should the current machine 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.g. -45 or parentheses e.g. (45).) Retain Machine Replace Machine Net Income Increase (Decrease) Operating costs $Entry field with correct answer 125000 $Entry field with correct answer 97500 $Entry field with correct answer 27500 New machine cost Entry field with correct answer 0 Entry field with incorrect answer (25200) Entry field with correct answer (25200) Salvage value (old) Entry field with correct answer 0 Entry field with correct answer (8100) Entry field with correct answer 8100 Total $Entry field with correct answer 125000 $Entry field with incorrect answer 64200 $Entry field with correct answer 10400 The current machine should be Entry field with correct answer.

Answer 1

	Retain Machine	Replace Machine	Net Income Increase (Decrease)
Operating costs	125000	97500	27500
New machine cost	0	25200	(25200)
Salvage value (old)	0	(8100)	8100
Total	125000	114600	10400
The current machine should be replaced