Corba Company is evaluating whether to replace an old machine with a new, more efficient machine. Corba purchased the old machine for $600,000, and there is $180,000 of accumulated depreciation recorded for the machine. It has a 10-year remaining useful life and a $0 salvage value. It costs $480,000 per year to operate. The new machine would have a 10-year useful life and a $0 salvage value. It would cost $1,200,000, and its annual operating costs would be $361,200. If the old machine is replaced, it can be sold for $48,000 today. What is the net advantage (disadvantage) of replacing the old machine?

It is more convenient the new machine.

Explanation:

Giving the following information:

Corba purchased the old machine for $600,000, and there is $180,000 of accumulated depreciation recorded for the machine. It has a 10-year remaining useful life and a $0 salvage value. It costs $480,000 per year to operate. The new machine would have a 10-year useful life and a $0 salvage value. It would cost $1,200,000, and its annual operating costs would be $361,200. If the old machine is replaced, it can be sold for $48,000 today.

We will make an incremental analysis.

Year 0 = 48,000 - 1,200,000 = - 1,152,000

Year 1 to 10:

Cost save = 480,000 - 361,200 = 118,800*10 = 1,188,000

Effect on income = 1,188,000 - 1,152,000 = 36,000

It is more convenient the new machine.