Twyla Enterprises uses a computer for sales invoices: Retain or Replace the machine
Twyla Enterprises uses a word processing computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.
Current Machine New Machine
Original purchase cost $15,000 $25,000
Accumulated depreciation 6,000 ---
Estimated operating costs 24,000 18,000
Useful life 5 years 5 years
If sold now, the current machine would have a salvage value of 5,000. 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 5 years.
Complete the analysis to determine if the current machine should be replaced. (Ignore the time value of money. If answer is zero please enter 0, do not leave any fields blank. If the amount decreases total put a minus sign (-) before the amount.)
Retain Machine Replace Machine Net Income
Increase (Decrease)
Operating costs $ $ $
New machine cost
Salvage value (old)