The managers of a factory want to have a change analysis if they are going to continue
Question:
The managers of a factory want to have a change analysis if they are going to continue to use a machine that needs to be upgraded in production. The upgrade will cost $50,000 and the machine can be kept for a maximum of 3 years after that.
If sold at the end of the first year, the scrap value would be $20,000 or zero.
The annual operating cost will be $40,000 the first year and will increase by $10,000 each year.
A new machine with a maximum lifespan of 7 years can be purchased for $150,000.
The salvage value is defined by the relationship S = 120,000 - 20,000 k, where k is the number of years since purchase. (Recovery value cannot be less than 0).
Annual operating costs are estimated with the equation AOC = 60,000 + 10,000 k.
If the interest rate is 15% per year, determine whether and when to replace the machine.
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young