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 Saturday, 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 $15,000 $25,000
Accumulated depreciation $6,000
Estimated annual operating costs $25,000 $20,000
Remaining useful life 5 years 5 years
If sold now, the current machine would have a salvage value of $6,000. 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?
Retain Machine Replace Machine Net Income Increase (Decrease)
Operating costs $ $ $
New machine cost
Salvage value (old)
Total $ $ $