repare an incremental analysis to determine whether the
Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.
| Current Machine | New Machine | ||||||
|---|---|---|---|---|---|---|---|
| Original purchase cost | $15,000 | $25,200 | |||||
| $5,900 | _ | ||||||
| Estimated annual operating costs | $25,000 | $19,500 | |||||
| Remaining useful life | 5 years | 5 years |
If sold now, the current machine would have a salvage value of $8,100. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years.
Prepare an incremental analysis to determine whether the current machine should be replaced.
| Retain Machine |
Replace Machine |
Net Income Increase (Decrease) |
|||||
|---|---|---|---|---|---|---|---|
| Operating costs | $ | $ | $ | ||||
| New machine cost | |||||||
| Salvage value (old) | |||||||
| Total |
| The current machine should be replaced or retained. |
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