Question

Murl Plastics Inc. purchased a new machine one year ago at a cost of $84,000. Although the machine operates well, the president of Murl Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine would slash annual operating costs by two-thirds, as shown in the comparative data below:

  

	Present Machine			Proposed New Machine
Purchase cost new	$	84,000		$	126,000
Estimated useful life new		6	years		5	years
Annual operating costs	$	58,800		$	19,600
Annual straight-line depreciation		14,000			25,200
Remaining book value		70,000			—
Salvage value now		14,000			—
Salvage value in five years		0			0

  

In trying to decide whether to purchase the new machine, the president has prepared the following analysis:

  

Book value of the old machine	$	70,000
Less: Salvage value		14,000
Net loss from disposal	$	56,000

  

“Even though the new machine looks good,” said the president, “we can’t get rid of that old machine if it means taking a huge loss on it. We’ll have to use the old machine for at least a few more years.”

  

     Sales are expected to be $294,000 per year, and selling and administrative expenses are expected to be $176,400 per year, regardless of which machine is used.

  

Required:

1.	Prepare a summary income statement covering the next five years, assuming the following:

  

a.	The new machine is not purchased.
b.	The new machine is purchased.

Answer 1

hi...i tried my level best...if you have any doubt please comment me...thank you