Reference no: EM132621628

Majesty Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.

                                                      Current Machine                     New Machine

Original purchase cost                 $35,000                           $25,000

Accumulated depreciation              $ 15,000                               -

Estimated annual operating costs      $22,000                    $20,000

Useful life                                     5 years                        5 years

If sold now, the current machine would have a salvage value of $15,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years.

Instructions

Problem a. Should the current machine be replaced or still using the current one? (please show your calculation).

Problem b. Explain why?