Reference no: EM132971657

The operations manager of Harper Company believes that it is time to replace certain production machinery that is gradually becoming more expensive to service. The existing machinery was purchased in late 2017 for a total cost of $100,000. It was recently reported at a net book value of $60,000 on the company's balance sheet. Fortunately, another local business can make good use of this machinery and has offered to purchase it from Century Company for $275,000.

If the company indeed sells this existing machinery, it would then need to rent a newer model of the machinery at a monthly cost of $22,000. Partially offsetting the rental cost would be $5,000 of monthly savings that the new model would generate. These monthly savings pertain to lower operations/maintenance costs as well as increased production efficiencies.

In a draft report, the operations manager has concluded that the company should proceed with the sale/rental proposal. The report's conclusion is based on financial analysis that considers the following:

(i) the significant gain from selling the existing machinery,

(ii) the $22,000 monthly rental costs of the new model, and

(iii) the $5,000 monthly savings associated with the new model.

Required:

Problem 1: Comment on the analysis that underlies the draft report's conclusion. If applicable, identify any additional information to be considered before the company implements this proposal.