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10 June, 18:16

A machine purchased three years ago for $720,000 has a current book value using straight-line depreciation of $400,000: its operating expenses are $60,000 per year. A replacement machine would cost $480,000, have a useful life of nine years, and would require $26,000 per year in operating expenses. It has an expected salvage value of $130,000 after nine years. The current disposal value of the old machine is $170,000: if it is kept 9 more years, its residual value would be $20,000. Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced?

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  1. 10 June, 18:40
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    total cost of old machine $690000 and purchase new machine $584000

    replace old machine with new

    so cost saving $106000

    Explanation:

    given data

    current book value = $720,000

    depreciation = $400,000

    operating expenses = $60,000

    replacement machine cost = $480,000

    operating expenses = $26,000

    expected salvage value = $130,000

    current disposal value = $170,000

    residual value = $20,000

    to find out

    total costs and Should the old machine be replaced

    solution

    we find here total cost of old machine and new machine that is

    particular old machine new machine

    original cost is $720000 $480000

    current value is $400000

    now disposal val $170000

    9 year disposal value $20000 $130000

    annual opening cost $60000 $26000

    total cost $690000 $584000

    so

    total cost of old machine $690000 and purchase new machine $584000

    so it should be recommend here for replace old machine with new

    so cost saving $106000
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