A machine purchased three years ago for $720,000 has a current book value using straight-line depreciation of $400,000: its operating expenses are $60,000 per year. A replacement machine would cost $480,000, have a useful life of nine years, and would require $26,000 per year in operating expenses. It has an expected salvage value of $130,000 after nine years. The current disposal value of the old machine is $170,000: if it is kept 9 more years, its residual value would be $20,000. Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced?

total cost of old machine $690000 and purchase new machine $584000

replace old machine with new

so cost saving $106000

Explanation:

given data

current book value = $720,000

depreciation = $400,000

operating expenses = $60,000

replacement machine cost = $480,000

operating expenses = $26,000

expected salvage value = $130,000

current disposal value = $170,000

residual value = $20,000

to find out

total costs and Should the old machine be replaced

solution

we find here total cost of old machine and new machine that is

particular old machine new machine

original cost is $720000 $480000

current value is $400000

now disposal val $170000

9 year disposal value $20000 $130000

annual opening cost $60000 $26000

total cost $690000 $584000

so

total cost of old machine $690000 and purchase new machine $584000

so it should be recommend here for replace old machine with new

so cost saving $106000