Reference no: EM132918407
Question - Santosh Plastics Inc. purchased a new machine one year ago at a cost of $105,000. Although the machine operates well and has five more years of operating life, the president of Santosh Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market.
The new machine costs $157,500 and is expected to slash the current annual operating costs of $73,500 by two-thirds. The new machine is expected to last for five years, with zero salvage value at the end of five years. The current machine can be sold for $17,500 if the company decides to buy the new machine. The company uses straight-line depreciation.
In trying to decide whether to purchase the new machine, the president has prepared the following analysis:
Book value of the old machine$87,500 Less: Salvage value 17,500 Net loss from disposal$70,000
"Even though the new machine looks good," said the president, "we can't get rid of that old machine if it means taking a huge loss on it. We'll have to use the old machine for at least a few more years."
Sales are expected to be $367,500 per year, and selling and administrative expenses are expected to be $220,500 per year, regardless of which machine is used.
Required - Calculate the minimum saving in annual operating costs that must be achieved in order for the president to consider buying the new machine?
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