A machine purchased three years ago for $720,000 has a current book value using straight-line depreciation of $400,000, its operating expenses are $60.000 per year. A replacement machine would cost $480,000, have a useful life of nine years, and would require $26,000 per year in operating expenses. It has an expected salvage value of $130,000 after nine years. The current disposal value of the old machine is $170,000, if it is kept 9 more years, its residual value would be $20,000

Required:

Calculate the total costs in keeping the old machine and purchasing a new machine. Should the old machine be replaced?

The old machine should replace with new machine because there is cost saving of $106,000.

Explanation:

The computation of the total cost is shown below:-

Particulars                            Old machine             Purchase new machine

Original cost                         $720,000                  $480,000

Current value                        $400,000

Today Disposable value       $170,000

In 9 years Disposable value  $20,000                    $130,000

Annual operating cost            $60,000                    $26,000

Total Cost                                $690,000                  $584,000

So, the total cost of old machine is $690,000 and the Purchase new machine cost is $584,000. So, the old machine should replace with new machine because there is cost saving of $106,000.

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