Question

Zark Company relies heavily on a copier machine to process its paperwork. Recently the copy clerk has not been able to process all the necessary copies within the regular work week.

Management is considering updating the copier machine with a faster model.

	Current Copier	New Model
Original Purchase Cost	$8,000	$15,000
Accumulated Depreciation	6,000	0
Estimated annual operating costs	6,500	3,000
Useful life	5 years	5 years

If sold now, the current copier would have a salvage value of $1,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after five years.

Instructions

Prepare an analysis to show whether the company should retain or replace the machine

Answer 1

Analysis to show whether the company should retain or replace the machine

Particulars	Retain the Current Copier	Replace with a New Model	Net Income Increase (Decrease)
Total Operating costs	$32,500	$15,000	17500
New machine cost	0	$15,000	($15,000)
Salvage value of old Machine	0	($1,000)	$1,000
Totals	$32,500	$29,000	$3,500

Decision : The current copier should be replaced with a new model. This analysis shows that net income for the 5 year period will be $3,500 higher if old machine is replaced with a new model