Question

Morris Timber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines:

                                                                  Old Machine                New Machine

            Original purchase cost                    $340,000                     $370,000

            Accumulated depreciation                 230,000                             —

            Estimated life                                      5 years                        5 years

It is estimated that the new machine will produce annual cost savings of $85,000. The old machine can be sold to a scrap dealer for $8,000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives.

Instructions

Determine whether the company should purchase the new machine.

Solution

	Retain	Replace	Net Income increase(decrease)

The company should ------------   because---------------------------------------------------------------------------------------------------------

Answer 1