Chapter 13, Problem 21E

Exercise 6-21A Annual versus cumulative data for replacement decision

Because of rapidly advancing technology, Chicago Publications Corporation is considering replacing its existing typesetting machine with leased equipment. The old machine, purchased two years ago, has an expected useful life of six years and is in good condition. Apparently, it will continue to perform as expected for the remaining four years of its expected useful life. A four-year lease for equipment with comparable productivity can be obtained for $40,000 per year. The following data apply to the old machine:

Original cost	$480,000
Accumulated depredation	160,000
Current market value	190,000
Estimated salvage value	10,000

Required

a.    Determine the annual opportunity cost of using the old machine. Based on your computations, recommend whether to replace it.

b.    Determine the total cost of the lease over the four-year contract. Based on your computations, recommend whether to replace the old machine.