A machine purchased three years ago for $309,000 has a current book value using straight-line depreciation of $187,000; its operating expenses are $38,000 per year. A replacement machine would cost $235,000, have a useful life of nine years, and would require $8,000 per year in operating expenses. It has an expected salvage value of $64,000 after nine years. The current disposal value of the old machine is $72,000; if it is kept 9 more years, its residual value would be $18,000. Required Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced

a)

Opportunity Cost (Purchase value less Salvage Value)

Old Machine = $72,000 - $18,000 = $54,000

New Machine =$235,000 - $64,000 = $171,000

Operating Costs

Old Machine = $38,000 * 9 = $342,000

New Machine = $8,000 * 9 = $72,000

Total Cost = Opportunity cost + Operating Cost

Old machine Total Cost = $54,000 + $342,000 = $396,000

New Machine Total Cost = $171,000 + $72,000 = $243,000

b)

Should the old machine be replaced? YES

The cost of keeping the old machine is more than the cost of buying and operating the new machine, therefore it is advisable to replace the old machine.

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