Sala Co.is contemplating the replacement of an old machine with a new one.The following information has been gathered: $\begin{array}{lrr}
& \text { Old Machine } &\text { New Machine } \
\text { Price } & \$ 300,000 & \$ 600,000 \
\text { Accumulated Depreciation } & 90,000 & -0- \
\text { Remaining useful life } & 10 \text { years } & -0- \
\text { Useful life } & -0- & 10 \text { years } \
\text { Annual operating costs } & \$ 240,000 & \$ 180,600
\end{array}$ If the old machine is replaced it can be sold for $24000. The net advantage (disadvantage) of replacing the old machine is

Question

Sala Co.is contemplating the replacement of an old machine with a new one.The following information has been gathered: $\begin{array}{lrr} 
& \text { Old Machine } &\text { New Machine } \
\text { Price } & \$ 300,000 & \$ 600,000 \
\text { Accumulated Depreciation } & 90,000 & -0- \
\text { Remaining useful life } & 10 \text { years } & -0- \
\text { Useful life } & -0- & 10 \text { years } \
\text { Annual operating costs } & \$ 240,000 & \$ 180,600
\end{array}$ If the old machine is replaced it can be sold for $24000. The net advantage (disadvantage) of replacing the old machine is

Quizplus · Accepted Answer

The net advantage of replacing the old machine is the present value of the savings in operating costs less the initial investment. The present value of the savings in operating costs is:PV = $60,000 x (PVAF10%,10) = $363,636The initial investment is the cost of the new machine less the proceeds from the sale of the old machine:Initial investment = $600,000 - $24,000 = $576,000Therefore, the net advantage of replacing the old machine is:Net advantage = $363,636 - $576,000 = $(212,364)

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