Tesla management are trying to decide whether to keep an older piece of machinery or buy a replacement. Management was presented with the following information to assist in their decision: • The old machine was purchased three years ago for $720,000 and has a current book value using straight-line depreciation of $400,000. • The old machine incurs operating expenses of $60,000 per year. • The current disposal value of the old machine is $170,000; if it is kept nine more years, its remaining value would be $20,000. • The replacement machine would cost $480,000 and have a useful life of nine years. • The replacement machine has an expected salvage value of $130,000 after nine years. • The replacement machine would require $26,000 per year in operating expenses. Required Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced? Keep Old Machine Total costs Should the old machine be replaced? Purchase New Machine Yes
Tesla management are trying to decide whether to keep an older piece of machinery or buy a replacement. Management was presented with the following information to assist in their decision: • The old machine was purchased three years ago for $720,000 and has a current book value using straight-line depreciation of $400,000. • The old machine incurs operating expenses of $60,000 per year. • The current disposal value of the old machine is $170,000; if it is kept nine more years, its remaining value would be $20,000. • The replacement machine would cost $480,000 and have a useful life of nine years. • The replacement machine has an expected salvage value of $130,000 after nine years. • The replacement machine would require $26,000 per year in operating expenses. Required Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced? Keep Old Machine Total costs Should the old machine be replaced? Purchase New Machine Yes
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Tesla management are trying to decide whether to keep an older piece of machinery or buy a replacement. Management was
presented with the following information to assist in their decision:
• The old machine was purchased three years ago for $720,000 and has a current book value using straight-line depreciation of
$400,000.
• The old machine incurs operating expenses of $60,000 per year.
• The current disposal value of the old machine is $170,000; if it is kept nine more years, its remaining value would be $20,000.
• The replacement machine would cost $480,000 and have a useful life of nine years.
• The replacement machine has an expected salvage value of $130,000 after nine years.
• The replacement machine would require $26,000 per year in operating expenses.
Required
Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced?
Keep Old
Machine
Total costs
Should the old machine be replaced?
Purchase New
Machine
Yes
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