Exercise 6-18A (Static) Asset replacement decision LO 6-5
Tesla management are trying to decide whether to keep an older piece of machinery or buy a replacement. Management was
presented with the following information to assist in their decision:
• The old machine was purchased three years ago for $720,000 and has a current book value using straight-line depreciation of
$400,000.
• The old machine incurs operating expenses of $60,000 per year.
• The current disposal value of the old machine is $170,000; if it is kept nine more years, its remaining value would be $20,000.
• The replacement machine would cost $480,000 and have a useful life of nine years.
• The replacement machine has an expected salvage value of $130,000 after nine years.
• The replacement machine would require $26,000 per year in operating expenses.
Required
Calculate the total costs in keeping the old machine and purchase a new machine. Should the old machine be replaced??
Keep Old
Purchase New
Machine
Machine
Total costs
Should the old machine be replaced?
