Question

Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has a book value of $5,000, and its remaining useful life is five years. Annual costs are $4,000. A high school is willing to buy it for $2,000. New equipment would cost $18,000 with annual operating costs of $1,500. The new machine has an estimated useful life of five years.

Should the machine be replaced?

Proposal to Replace Equipment
Annual Variable Costs - Present Equipment $
Annual Variable Costs - New Equipment
Annual Differential Decrease in Cost $
Number of Years Applicable
Total Differential Decrease in Cost $
Proceeds from Sales of Present Equipment $
Cost of New Equipment
Annual Net Differential Increase in Cost - New Equipment $

Answer 1

Answer: No. The machine shouldn't be replaced.

Explanation:

Proposal to Replace Equipment

Annual Variable Costs - Present Equipment = $4000

Less: Annual Variable Costs - New Equipment = $1500

Annual Differential Decrease in Cost = $2500

Number of Years Applicable = 5

Total Differential Decrease in Cost = $2500 × 5 = $12500

Proceeds from Sales of Present Equipment = $2000

Cost of New Equipment = $8000

Annual Net Differential Increase in Cost - New Equipment = $18000 - $2000 = $16000

The machine shouldn't be replaced as the total differential decrease in cost is less than the annual net differential increase in cost of the new equipment.