New Machine Old Machine Original cost $900,000 $540,000 Useful life 5 years 2 years O years Current age 3 years Remaining useful life Accumulated depreciation 2 years 2 years Not acquired yet $540,000 Not acquired yet Not acquired yet Book value $360,000 Current disposal value (in cash) Terminal disposal value (in cash 2 years from now) $216,000 $0 $0 Annual operating costs (maintenance, energy, repairs, coolants, and so on) $995,000 $800,000 Required 1. Assume that Smith's priority is to receive the promotion and she makes the equipment-replacement decision based on the next one year's accrual-based net operating income. Which alternative would she choose? Show your calculations. 2. What are the relevant factors in the decision? Which alternative is in the best interest of the company over the next 2 years? Show your calculations. 3. At what cost would Smith be willing to purchase the new equipment? Explain.
New Machine Old Machine Original cost $900,000 $540,000 Useful life 5 years 2 years O years Current age 3 years Remaining useful life Accumulated depreciation 2 years 2 years Not acquired yet $540,000 Not acquired yet Not acquired yet Book value $360,000 Current disposal value (in cash) Terminal disposal value (in cash 2 years from now) $216,000 $0 $0 Annual operating costs (maintenance, energy, repairs, coolants, and so on) $995,000 $800,000 Required 1. Assume that Smith's priority is to receive the promotion and she makes the equipment-replacement decision based on the next one year's accrual-based net operating income. Which alternative would she choose? Show your calculations. 2. What are the relevant factors in the decision? Which alternative is in the best interest of the company over the next 2 years? Show your calculations. 3. At what cost would Smith be willing to purchase the new equipment? Explain.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Equipment replacement decisions and performance evaluation. Susan Smith manages the Wexford plant of Sanchez Manufacturing. A representative of Darnell Engineering approaches Smith about replacing a large piece of manufacturing equipment that Sanchez uses in its process with a more efficient model. While the representative made some compelling arguments in favor of replacing the 3-year-old equipment, Smith is hesitant. Smith is hoping to be promoted next year to manager of the larger Detroit plant, and she knows that the accrual-basis net operating income of the Wexford plant will be evaluated closely as part of the promotion decision. The following information is available concerning the equipment replacement decision:
Sanchez uses straight-line
Transcribed Image Text:New Machine
Old Machine
Original cost
$900,000
$540,000
Useful life
5 years
2 years
O years
Current age
3 years
Remaining useful life
Accumulated depreciation
2 years
2 years
Not acquired yet
$540,000
Not acquired yet
Not acquired yet
Book value
$360,000
Current disposal value (in cash)
Terminal disposal value (in cash 2 years from now)
$216,000
$0
$0
Annual operating costs (maintenance, energy, repairs, coolants,
and so on)
$995,000
$800,000
Transcribed Image Text:Required
1. Assume that Smith's priority is to receive the promotion and she makes the equipment-replacement
decision based on the next one year's accrual-based net operating income. Which alternative would
she choose? Show your calculations.
2. What are the relevant factors in the decision? Which alternative is in the best interest of the company
over the next 2 years? Show your calculations.
3. At what cost would Smith be willing to purchase the new equipment? Explain.
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