Pitt National is deciding whether to replace a machine that it currently owns with a new...

 

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Pitt National is deciding whether to replace a machine that it currently owns with a new machine that has just recently appeared on the market. The current machine and the new machine have equal productive capacities, equal life expectancies of 5 years and will produce exactly the same quality good. But, the new machine uses raw materials and labor much more efficiently. You have assembled the following data. Existing Machine: Book value Current sale price of the machine Operating expenses over the next 5 years, discounted to the present $165,000 $ 72,000 $1,075,000 New Machine: Purchase price Operating expenses over the next 5 years, discounted to the present Pitt's accountant presents the following analysis to the CEO Current machine: Investment: Book value of current machine Operating expenses Total cost New Machine Investment. Loss on sale of current machine Operating expenses Total expenses $165,000 $1.075.000 $1,237,000 $452,000 $ 93,000 $625.000 $1,170,000 $452,000 $625,000 On the basis of the above analysis Pitt's accountant recommends that that the current machine should be replaced since the new machine will save the firm $67,000. Jane, a promising recent employee with an MBA degree disagrees with the accountant's analysis and recommends that Pitt should keep its existing machine. She argues that the correct way to make the decision is via an incremental analysis and presents the following numbers to the CEO: Incremental investment in new machine ($452,000-72,000) Add loss on sale of current machine Less savings in operating expenses (1,075,000-625,000) Gain from keeping the current machine $380,000 $93,000 $450.000 $23,000 Indicate and explain what errors are present in each of the above analysis, and present what you think is the correct analysis and correct recommendation. Pitt National is deciding whether to replace a machine that it currently owns with a new machine that has just recently appeared on the market. The current machine and the new machine have equal productive capacities, equal life expectancies of 5 years and will produce exactly the same quality good. But, the new machine uses raw materials and labor much more efficiently. You have assembled the following data. Existing Machine: Book value Current sale price of the machine Operating expenses over the next 5 years, discounted to the present $165,000 $ 72,000 $1,075,000 New Machine: Purchase price Operating expenses over the next 5 years, discounted to the present Pitt's accountant presents the following analysis to the CEO Current machine: Investment: Book value of current machine Operating expenses Total cost New Machine Investment. Loss on sale of current machine Operating expenses Total expenses $165,000 $1.075.000 $1,237,000 $452,000 $ 93,000 $625.000 $1,170,000 $452,000 $625,000 On the basis of the above analysis Pitt's accountant recommends that that the current machine should be replaced since the new machine will save the firm $67,000. Jane, a promising recent employee with an MBA degree disagrees with the accountant's analysis and recommends that Pitt should keep its existing machine. She argues that the correct way to make the decision is via an incremental analysis and presents the following numbers to the CEO: Incremental investment in new machine ($452,000-72,000) Add loss on sale of current machine Less savings in operating expenses (1,075,000-625,000) Gain from keeping the current machine $380,000 $93,000 $450.000 $23,000 Indicate and explain what errors are present in each of the above analysis, and present what you think is the correct analysis and correct recommendation.

Answer rating: 100% (QA)

The scenario presented here involves a decision on whether to replace an existing machine with a new one Pitt Nationals accountant and an employee nam... View the full answer