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30 August, 18:32

A machine purchased three years ago for $303,000 has a current book value using straight-line depreciation of $184,000; its operating expenses are $36,000 per year. A replacement machine would cost $239,000, have a useful life of nine years, and would require $12,000 per year in operating expenses. It has an expected salvage value of $76,000 after nine years. The current disposal value of the old machine is $88,000; if it is kept 9 more years, its residual value would be $15,000. Calculate the total costs in keeping the old machine and purchase a new machine.

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  1. 30 August, 19:27
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    Answer: Cost of keeping old machine is $469,000

    Cost of Purchasing New Machine is $271,000

    Explanation:

    Keeping the old machine.

    When calculating the cost of keeping the machine you use the disposal value.

    Cost = (Disposal Value - Residual Value) + Total Operating Costs for remaining lifetime

    Cost = (88,000 - 15,000) + (36,000 * 11 years)

    Cost = 73,000 + 396,000

    Cost = $469,000

    Cost of keeping old machine is $469,000.

    Cost of New machine

    Cost = (Disposal Value - Residual Value) + Total Operating Costs for remaining lifetime

    Cost = (239,000 - 76,000) + (12,000 * 9)

    Cost = 163,000 + 108,000

    Cost = $271,000

    Cost if New machine purchased,

    = $271,000
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