Financial Managerial Accounting:

appendix 4

Appendix Four (Equipment Replacement Decision) Objective: The proposed manufacturing plant has a food packaging equipment. The analysis would provide lacob with decisice support as to use that equipment or procure a new ane. Scenario: The current equipment was purchased eight years ago for $750,000 and has eight useful years remaining. The new machine will cost $380,000 and will have the sarne useful tife remaining as the old machine and will have acro disposal value. Currently the annial operating cost is 5110,000 and will reduce by 50 if the new equipenent is purchased. If the new equipment is procured, it will need to be shut down once a year for maintenance purposes. Opportunity cost of the shut down period is as follows: - 56,000 in each of the years 1.3 - 58,000 in each of the years 4 and 5 - 510,000 in each of the years 6 and 7 The old equipment will have limited use and can only fetch $120,000 when dispored off at this time. Methodolosy? The group would calculate the net advantage/ didadyantage of buying the new equipment by applying a diseount rate of 10% wherever applicable