Question

(Apply Least Cost Approach)

Val-Tek Company is considering replacing an old threading machine with a new threading machine that would substantially reduce annual operating costs. Selected data relating to the old and new machines are presented below:

	Old Machine	New Machine
Overhauling/Purchase Cost	$40,000	$250,000
Salvage Value Now	$30,000	-
Annual Cash Operating Cost	$150,000	$90,000
Salvage Value in Six Years	$0	$50,000
Remaining Life	6 Years	6 Years

Val-Tek Company uses a 10% discount rate. Should the company replace the old threading machine? Use Least Cost Method.

Answer 1

The company should not replace the old machine because overhauling and using the machine will lead to lesser cost.