Question - Rose Timber Corporation uses a machine that removes the bark from 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:
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Old Machine
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New Machine
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Original purchase cost
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$430,000
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$380,000
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Accumulated depreciation
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220,000
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-----
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Estimated useful life
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5 years
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5 years
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It is estimated that the new machine will produce annual cost savings of $75,000. The old machine can be sold to a scrap dealer for $15,000. Both machines will have a salvage value of zero if operated for the remainder of their useful life.
Instructions:
a) Determine whether the Rose Timber Corporation should purchase the new machine.
b) Should Rose Timber Corp. retain or replace the old machine? Justify your decision.