Question

Mill Inc. is considering replacing a machine that has been used in its factory for four year. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows: Old Machine Cost of machine, 10-year life $95,000 Annual depreciation (straight-line) 11,000 Annual manufacturing costs, excluding depreciation 28,000 Annual nonmanufacturing operating expenses 8,000 Annual revenue 80,000 Current estimated selling price of machine 30,000 New Machine Purchase price of machine, six-year life $140,000 Annual depreciation (straight-line) 20,000 Estimated annual manufacturing costs, 6,000 Excluding depreciation Annual nonmanufacturing operating expenses and revenue are not expected to be affected by the purchase of the new machine. (15 points) Instructions: a) Prepare a differential analysis comparing operations using the present machine with operations using the new machine. The analysis should indicate the total differential income that would result over the six-year analysis if the new machine is acquired. b) What other factors should be considered before a final decision is made?

Answer 1