An old machine that originally cost $9,500 thus far has accumulated depreciation of $1,900.The remaining useful life is four years,with no salvage value at the end of its useful life.A new machine is now available that costs $8,500,with a useful life of five years and no residual value.The old machine could be sold now for $5,900.The annual cash operating costs for the old machine are $5,000,but for the new machine they would be only $2,500.Gross revenue from the products would be $12,000 annually for either machine.The company should

Question

Quizplus · Accepted Answer

To determine the best choice, we need to compare the costs and benefits of keeping the old machine versus replacing it with the new machine.

Costs of keeping the old machine: 
- Annual cash operating costs: $5,000 
- Remaining useful life: 4 years 
- Salvage value at the end of useful life: $0 
- Accumulated depreciation: $1,900 
- Potential loss on disposal now: $9,500 - $5,900 = $3,600

Benefits of keeping the old machine: 
- None identified

Costs of replacing the old machine: 
- Cost of new machine: $8,500 
- Annual cash operating costs: $2,500 
- Useful life: 5 years 
- Salvage value at the end of useful life: $0

Benefits of replacing the old machine: 
- Annual revenue: $12,000

Comparing the costs and benefits, we see that the annual cash operating costs for the new machine are less than half of the old machine's costs. Additionally, the new machine would generate the same amount of revenue but would be used for one additional year. While there is a potential loss on disposal of the old machine, this loss would be less than the cost of purchasing the new machine. Therefore, the best choice is to replace the old machine with the new machine.

An Old Machine That Originally Cost $9,500 Thus Far Has