PROBLEM ONE 30 points NAME Glven A machine which cost 240 K

PROBLEM ONE ( 30 points) NAME: Glven: A machine which cost 240 KS to purchase. has depreciated im has a remaining useful life of 4 years, and the disposal cost which stands on • nas depreciatod imity to 80 KS IN presently, shall be reduced to OS at the end of this time. Available on a a new machine, which will reduce the present operating costs ol end of this time available on the market nou s Il reduce the present operating costs of 150 KS per annum I 40%, whose purchase price is 120 KS. useful life is four years, and yo will be 2K$ at the end of its useful life. The sales revenue of 300 KS pe ime is four years, and whose diaposal cont e sales revenue of 300 KS per annum in remain unchanged throughout the time, regardless of the machine used Required: ) How old is the present machine? Snould this operation retain the old machine of conven to the new one, they wan\" to maximize their profits? Show by relevant calculations and by writing the income statement.

Solution

Solution - a:

Cost of Old Machine = $240,000

Current book value = $80,000

Remaining useful life = 4 Years

Current Disposal Value = $8,000

As stated, disposal value of machine shall be reduced to $0 at end of its useful life,

Therefore annual depreciation = $80000/4 = $20,000

Hence total life of old machine = $240,000/20000 = 12 years

Therefore currently present machine is 8 years (12-4) old.

Solution - b:

Cost of new machine = $120,000

Life = 4 Years

Disposal Cost = $2,000

Annual depreciation = ($120,000 - $2,000)/4 = $29,500

If old machine is replaced with new machine than loss on sale of old machine = $80,000 - $8000 = $72,000

Operating cost if old machine is used = $150,000

Operating cost if new machine is used = $150,000*60% = $90,000

Total profit if new machine is replaced by old machine for 4 year is $650,000 which is increased by $130,000 from first alternative. Hence to maximized the profit, operation should convert old machine in to new machine.

Compartive Income Statement
Particulars	Old Machine Continue (Alt 1)	Old Machine replaced with New Machine (Alt 2)
Year 1	Year 2	Year 3	Year 4	Total	Year 1	Year 2	Year 3	Year 4	Total
Sales	$300,000.00	$300,000.00	$300,000.00	$300,000.00	$1,200,000.00	$300,000.00	$300,000.00	$300,000.00	$300,000.00	$1,200,000.00
Operating Cost	$150,000.00	$150,000.00	$150,000.00	$150,000.00	$600,000.00	$90,000.00	$90,000.00	$90,000.00	$90,000.00	$360,000.00
Depreciation	$20,000.00	$20,000.00	$20,000.00	$20,000.00	$80,000.00	$29,500.00	$29,500.00	$29,500.00	$29,500.00	$118,000.00
Loss on sale of old machine	$0.00	$0.00	$0.00	$0.00	$0.00	$72,000.00	$0.00	$0.00	$0.00	$72,000.00
Net Income	$130,000.00	$130,000.00	$130,000.00	$130,000.00	$520,000.00	$108,500.00	$180,500.00	$180,500.00	$180,500.00	$650,000.00