### Managing Equipment Replacement in ManufacturingBaird Moran manages the cutting department of Greene Benson Company. On January 1, Year 2, he purchased a tree-cutting machine for $370,000. This machine had an estimated useful life of 5 years with zero salvage value, and the operating cost is $85,000 annually. Developments in technology have led to a more advanced machine being available on January 1, Year 3. This new machine costs $198,000, features a 20 percent reduction in operating costs, and has a 4-year useful life with zero salvage value.Currently, the market value of the old machine on January 1, Year 3, is $210,000, with a book value of $296,000. Straight-line depreciation applies to both machines. The company expects revenue of $240,000 per year from using either machine.### Required Analyses#### a. Replacement DecisionDetermine if it's financially advantageous to replace the old machine on January 1, Year 3.#### b. Income Statement Projection (Old Machine)Create income statements for four years (Year 3 through Year 6) assuming the old machine remains in use.#### c. Income Statement Projection (New Machine)Generate income statements for the same period assuming the old machine is replaced with the new one.### Decision Framework**Recommendation Table**- **Decision:** Options to retain or replace the old machine.- **Total Available Costs:** An area to calculate and compare costs.- **Query:** Assess if the old machine should be replaced on January 1, Year 3.By evaluating the costs, depreciation, and potential savings from reduced operating costs, Moran can make an informed decision on whether updating equipment will provide a strategic advantage and financial improvement for his department.

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Description: ### Managing Equipment Replacement in ManufacturingBaird Moran manages the cutting department of Greene Benson Company. On January 1, Year 2, he purchased a tree-cutting machine for $370,000. This machine had an estimated useful life of 5 years with

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Baird Moran manages the cutting department of Greene Benson Company. He purchased a tree-cutting machine on January 1, Year 2. for $370,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $85,000 per year. Technological developments resulted in the development of a more advanced machine available for purchase on January 1, Year 3, that would allow a 20 percent reduction in operating costs. The new machine would cost $198.000 and have a 4-year useful life and zero salvage value. The current market value of the old machine on January 1, Year 3, Is $210,000, and its book value is $296,000 on that date. Straight-line depreciation is used for both machines. The company expects to generate $240,000 of revenue per year from the use of either machine.

Baird Moran manages the cutting department of Greene Benson Company. He purchased a tree-cutting machine on January 1, Year 2. for $370,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $85,000 per year. Technological developments resulted in the development of a more advanced machine available for purchase on January 1, Year 3, that would allow a 20 percent reduction in operating costs. The new machine would cost $198.000 and have a 4-year useful life and zero salvage value. The current market value of the old machine on January 1, Year 3, Is $210,000, and its book value is $296,000 on that date. Straight-line depreciation is used for both machines. The company expects to generate $240,000 of revenue per year from the use of either machine.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Depreciation Methods

The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.

Depreciation Accounting

In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.

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Question

### Managing Equipment Replacement in Manufacturing

Baird Moran manages the cutting department of Greene Benson Company. On January 1, Year 2, he purchased a tree-cutting machine for $370,000. This machine had an estimated useful life of 5 years with zero salvage value, and the operating cost is $85,000 annually. Developments in technology have led to a more advanced machine being available on January 1, Year 3. This new machine costs $198,000, features a 20 percent reduction in operating costs, and has a 4-year useful life with zero salvage value.

Currently, the market value of the old machine on January 1, Year 3, is $210,000, with a book value of $296,000. Straight-line depreciation applies to both machines. The company expects revenue of $240,000 per year from using either machine.

### Required Analyses

#### a. Replacement Decision
Determine if it's financially advantageous to replace the old machine on January 1, Year 3.

#### b. Income Statement Projection (Old Machine)
Create income statements for four years (Year 3 through Year 6) assuming the old machine remains in use.

#### c. Income Statement Projection (New Machine)
Generate income statements for the same period assuming the old machine is replaced with the new one.

### Decision Framework

**Recommendation Table**
- **Decision:** Options to retain or replace the old machine.
- **Total Available Costs:** An area to calculate and compare costs.
- **Query:** Assess if the old machine should be replaced on January 1, Year 3.

By evaluating the costs, depreciation, and potential savings from reduced operating costs, Moran can make an informed decision on whether updating equipment will provide a strategic advantage and financial improvement for his department.

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