Exercise 618A Asset replacement decision LO 65 A machine pur

Exercise 6-18A Asset replacement decision LO 6-5 A machine purchased three years ago for $302,000 has a current book value using straight-line depreciation of $189,000; its operating expenses are $37,000 per year. A replacement machine would cost $221,000, have a useful life of nine years, and would require $9,000 per year in operating expenses. It has an expected salvage value of $78,00O after nine years. The current disposal value of the old machine is $87,000; if it is kept 9 more years, its residual value would be $14,000. Required Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced? Keep Old Machine Purchase New Machine Total costs Should the old machine be replaced?

Solution

Total costs: Keep old machine 319000 =(37000*9)-14000 Purchase old machine 137000 =221000+(9000*9)-78000-87000 Yes, the old machine should be replaced