Exercise 21-14

Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Sat., to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.

Current Machine New Machine Original purchase cost $15,400 $24,500 Accumulated depreciation $5,600 _ Estimated annual operating costs $24,800 $19,500 Remaining useful life 5 years 5 years

If sold now, the current machine would have a salvage value of $8,700. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years. Should the current machine be replaced? (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Retain Machine Replace Machine Net Income Increase (Decrease) Operating costs $ $ $ New machine cost Salvage value (old) Total $ $ $

The current machine should be replaced retained .