Crane Company is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine New Machine Price $200000 $400000 Accumulated Depreciation 60000 -0- Remaining useful life 10 years -0- Useful life -0- 10 years Annual operating costs $160000 $120000 If the old machine is replaced, it can be sold for $14000. The company uses straight-line depreciation with a zero salvage value for all of its assets. The net advantage (disadvantage) of replacing the old machine is

Crane Company

The net advantage of replacing the old machine is:

= $154,000

Explanation:

a) Data and Calculations:

                                       Old Machine      New Machine

Price                                  $200,000             $400,000

Accumulated Depreciation  60,000                      -0-

Remaining useful life          10 years                      -0-

Useful life                                  -0-                 10 years

Annual operating costs   $160,000              $120,000

Relevant costs:

                                                Old Machine      New Machine

Annual operating costs           $160,000             $120,000

Total annual operating costs 1,600,000            1,200,000 ($120,000 * 10)

Relevant cost Price                    140,000              400,000

Sales value of old machine                                    (14,000)

Total costs                            $1,740,000         $1,586,000

The net advantage of replacing the old machine is $154,000 ($1,740,000 - $1,586,000)