A company is considering whether to replace a machine. The old machine costs $90,000 and is being depreciated at 10% per annum using the straight line method. It is written down value is no $36,000 and it has a trade in value of $20,000. The new machine would cost $220,000 after it has a trade-in but would double production, all of which could be sold.
The new machine would also be depreciated using the straight line method over ten years. Currently the contribution margin per month is $8000.
a. What information is relevant to the replacement of the machine?
b. Do you consider that the machine should be replaced?