Morris Timber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines:Old Machine New MachineOriginal purchase cost $340,000 $370,000Accumulated depreciation 230,000 - Estimated life 5 years 5 yearsIt is estimated that the new machine will produce annual cost savings of $85,000. The old machine can be sold to a scrap dealer for $8,000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives. InstructionsDetermine whether the company should purchase the new machine.

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Business

Nibbles

2 November, 16:27

Morris Timber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines:Old Machine New MachineOriginal purchase cost $340,000 $370,000Accumulated depreciation 230,000 - Estimated life 5 years 5 yearsIt is estimated that the new machine will produce annual cost savings of $85,000. The old machine can be sold to a scrap dealer for $8,000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives. InstructionsDetermine whether the company should purchase the new machine.

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Braelyn Liu · Answer 1

The new machine should be purchased as it would bring in net benefits of $63,000

Explanation:

The incremental cash flow analysis is the consideration of cash cash inflows and outflows of alternative projects in order to decide on which project the firm should invest.

By purchasing the new machine, the company would incur acquisition cost of $370,000 which is an outflow

The purchase of the new machine would bring $85,000 cost savings for five years which is $425,000 in total ($85,000*5) in addition to receiving $8000 scrap value from the old machine, which sums up to be $433,000 inflows.

Net benefit = inflows - outflow=$433,000-$370,000=$63,000