Reference no: EM131779871

Question - Rose Timber Corporation uses a machine that removes the bark from timber. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. The management is considering replacing the machine with a more efficient one, which will minimize downtime and excessive labor costs. Data are presented below for the two machines:

	Old Machine	New Machine
Original purchase cost	$430,000	$380,000
Accumulated depreciation	220,000	-----
Estimated useful life	5 years	5 years

It is estimated that the new machine will produce annual cost savings of $75,000. The old machine can be sold to a scrap dealer for $15,000. Both machines will have a salvage value of zero if operated for the remainder of their useful life.

Instructions:

a) Determine whether the Rose Timber Corporation should purchase the new machine.

b) Should Rose Timber Corp. retain or replace the old machine? Justify your decision.