Question

Exercise 23-12 Keep or replace LO A1 Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $41,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $51,000. Variable manufacturing costs are $33,900 per year for this machine. Information on two alternative replacement machines follows. Alternative A $119,000 22,700 Cost Variable manufacturing costs per year Alternative B $115,000 10,400 eBook Calculate the total change in net income if Alternative A, B is adopted. Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase?

Answer 1

					Alternative A		Alternative B
		Cost of new Machine			$119,000.00		$115,000.00
		Cash received on Trade in old machine			$51,000.00		$51,000.00
		Net Cost			$68,000.00		$64,000.00
		Existing Variable Cost			$33,900.00		$33,900.00
		New Variable Cost			$22,700.00		$10,400.00
		Reduction in Variable Cost			$11,200.00		$23,500.00
		Total Change in net income			$11,200.00		$23,500.00
		Payback period for investment			Net Cost		Net Cost
					Total Change in net income		Total Change in net income
					$68,000.00		$64,000.00
					$11,200.00		$23,500.00
		Payback period for investment			6.07		2.72
Considering the lower payback period, and low investment cost, Alternative B should be considered.