Sala Co.is contemplating the replacement of an old machine with a new one.The following information has been gathered: . $\begin{array}{lrr}&\text { Old Machine }&\text { New Machine }\
\text { Price } & \$ 300,000 & \$ 600,000 \
\text { Accumulated Depreciation } & 90,000 & -0 \text { - } \
\text { Remaining useful life } & 10 \text { years } & -0 \text { - } \
\text { Useful life } & -0- & 10 \text { years } \
\text { Annual operating costs } & \$ 240,000 & \$ 180,600
\end{array}$ If the old machine is replaced, it can be sold for $24,000.
-The net advantage (disadvantage) of replacing the old machine is

Question

Quizplus · Accepted Answer

The net advantage of replacing the old machine is the difference between the present value of the cash inflows and outflows associated with the new machine and the present value of the cash inflows and outflows associated with the old machine.The present value of the cash inflows associated with the new machine is the sum of the present value of the annual operating cost savings and the present value of the salvage value. The present value of the cash outflows associated with the new machine is the initial investment.The present value of the cash inflows associated with the old machine is the present value of the salvage value. The present value of the cash outflows associated with the old machine is the initial investment and the present value of the annual operating costs.The net advantage of replacing the old machine is:PV(Cash inflows from new machine) - PV(Cash outflows from new machine) - PV(Cash inflows from old machine) + PV(Cash outflows from old machine)= PV(Annual operating cost savings) + PV(Salvage value of new machine) - Initial investment of new machine - PV(Salvage value of old machine) + Initial investment of old machine + PV(Annual operating costs of old machine)= (PV factor of 10% for 10 years x $60,000) + ($24,000 x PV factor of 10% for 10 years) - $600,000 - $24,000 + $300,000 + ($240,000 x PV factor of 10% for 10 years)= $18,000

Sala Cois Contemplating the Replacement of an Old Machine with a a New