LF Manufacturing is deciding whether to keep or replace an old machine. It obtains the following information: Old Machine New Machine Original cost $10,900 $8,200 Useful life 10 years 3 years Current age 7 years 0 years Remaining useful life 3 years 3 years Accumulated depreciation $7,630 N/A Book value $3,270 N/A Current disposal value $2,700 $0 Annual cash operating costs $17,500 $14,500 LF Manufacturing uses straight-line depreciation. Ignore the time value of money and income taxes. What is the difference in dollars between the choice to keep the machine and the choice to replace the machine?
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.
LF Manufacturing is deciding whether to keep or replace an old machine. It obtains the following information:
Old Machine New Machine
Original cost $10,900 $8,200
Useful life 10 years 3 years
Current age 7 years 0 years
Remaining useful life 3 years 3 years
Book value $3,270 N/A
Current disposal value $2,700 $0
Annual cash operating costs $17,500 $14,500
LF Manufacturing uses straight-line depreciation. Ignore the time value of money and income taxes. What is the difference in dollars between the choice to keep the machine and the choice to replace the machine?
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