Marcus Stewart, the production manager at Galvin Company, purchased a cutting machine for the company last year. Six months after the purchase of the cutting machine, Stewart learned about a new cutting machine that is more reliable than the machine that he purchased. The following information is available for the two machines:

OLD MACHINE NEW MACHINE

Acquisition cost $$330,000$ $$350,000$

Remaining life $5$ years $5$ years

Salvage value now $$95,000--$

Salvage value at the end of $5$ years $$3,000$ $$7,000$

Annual operating costs for the old machine are $$170,000.$ The new machine will decrease annual operating costs by $$85,000.$ These amounts do not include any charges for depreciation. Company uses the straight$-$ line depreciation method. These estimates of operating costs exclude rework costs. The new machine will also result in a reduction in the defect rate from the current $4\%$ to $1\%.$ All defective units are reworked at a cost of $$2$ per unit. The company, on average, produces $130,000$ units annually.

Requirement:

Should Stewart replace the old machine with the new machine? Explain and show assumptions and calculations

Answer rating: 100% (QA)

Should Galvin Company Replace the Cutting Machine Analysis Replacing the old machine with the new one requires comparing the incremental benefits with ... View the full answer