Reference no: EM133114198

Question - After consultation with the production manager, Mr Jordan is considering the purchase of a new machine. The new machine will comply with new environmentally friendly technology and will cut scrap and rework rates (the cost of remedying manufacturing problems), resulting in substantial savings in materials and labour costs. A production manager has gathered the following information concerning the old machine and the proposed new one.

Information for replacing old machine

Old machine		Proposed new machine
Original cost	£125,000	List price new	£150,000
Remaining book value	£90,000	Expected life	5 years
Remaining life	5 years	Disposal value in five years	£0
Disposal value now	£50,000	Annual variable operating expenses	£220,000
Disposal value in five years	£0	Annual revenue from sales	£500,000
Annual variable operating expenses	£265,000
Annual revenue from sales	£500,000

Required -

1. Using the information in the table above, and your knowledge of relevant costs, calculate the difference in profit over the next five years between keeping and replacing the old machine.

2. Evaluate the response of the managing director to the proposed new machine.