Macintosh Printing, Inc., purchased a $20,000 printing machine two years ago. The company expected this machine to have a seven-year life and a salvage value of $5,000. The company spent $5,000 last year on repairs, and current operating costs are running at the rate of $8,000 per year. Furthermore, the anticipated salvage value of the machine has been reduced to $2,500 at the end of its useful life. In addition, the company has found that the machine has a current market value of $10,000. A sales person offers a new printing machine for $18,000 with a useful life of 5 years. This new printer has no salvage value. The maintenance expenses of the new printer is $6,000 annually. The company’s MARR is 12%. a) Using Insider’s point of view, analyze if the replacement needs to be made. b) If the useful life of the new machine is 6 years, conduct the replacement analysis. Has the decision changed from the previous scenario? Justify.
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.
Macintosh Printing, Inc., purchased a $20,000 printing machine two years ago. The company expected this machine to have a seven-year life and a salvage value of $5,000. The company spent $5,000 last year on repairs, and current operating costs are running at the rate of $8,000 per year. Furthermore, the anticipated salvage value of the machine has been reduced to $2,500 at the end of its useful life. In addition, the company has found that the machine has a current market value of $10,000.
A sales person offers a new printing machine for $18,000 with a useful life of 5 years. This new printer has no salvage value. The maintenance expenses of the new printer is $6,000 annually. The company’s MARR is 12%.
a) Using Insider’s point of view, analyze if the replacement needs to be made.
b) If the useful life of the new machine is 6 years, conduct the replacement analysis. Has the decision changed from the previous scenario? Justify.
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