Santosh Plastics Inc. purchased a new machine one year ago at a cost of $108,000. Although the machine operates well and has five more years of operating life, the president of Santosh Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine costs $162,000 and is expected to slash the current annual operating costs of $75,600 by two-thirds. The new machine is expected to last for five years, with zero salvage value at the end of five years. The current machine can be sold for $18,000 if the company decides to buy the new machine. The company uses straight-line depreciation. In trying to decide whether to purchase the new machine, the president has prepared the following analysis: Book value of the old machine Less: Salvage value Net loss from disposal $90,000 18,000 $72,000 "Even though the new machine looks good," said the president, "we can't get rid of that old machine if it means taking a huge loss on it. We'll have to use the old machine for at least a few more years." Sales are expected to be $378,000 per year, and selling and administrative expenses are expected to be $226,800 per year, regardless of which machine is used.

Santosh Plastics Inc. purchased a new machine one year ago at a cost of $108,000. Although the machine operates well and has five more years of operating life, the president of Santosh Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine costs $162,000 and is expected to slash the current annual operating costs of $75,600 by two-thirds. The new machine is expected to last for five years, with zero salvage value at the end of five years. The current machine can be sold for $18,000 if the company decides to buy the new machine. The company uses straight-line depreciation. In trying to decide whether to purchase the new machine, the president has prepared the following analysis: Book value of the old machine Less: Salvage value Net loss from disposal $90,000 18,000 $72,000 "Even though the new machine looks good," said the president, "we can't get rid of that old machine if it means taking a huge loss on it. We'll have to use the old machine for at least a few more years." Sales are expected to be $378,000 per year, and selling and administrative expenses are expected to be $226,800 per year, regardless of which machine is used.

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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