Chambers Company bought Machine 1 on March 5, Year 1, for $5,000 cash. The estimated salvage was $200 and the estimated life was 11 years. On March 5, Year 2, the company learned that it could purchase a different machine for $8,000 cash. It would save the company an estimated $250 per year. The new machine would have no estimated salvage and an estimated life of 10 years. The company could sell Machine 1 for $3,000 on March 5, Year 2. Ignoring income taxes, which of the following calculations would best assist the company in deciding whether to purchase the new machine? (Present value of an annuity of $250) + $3,000 – $8,000.

The sale of the first machine for $3,000 and the purchase of the new machine for $8,000 on 3/5/Year 2 results in an incremental cost to the company of $5,000. If the present value of the future savings from the second machine (present value of an annuity of $250) exceeds $5,000, the company should purchase the new machine. Note that the remaining estimated useful life of the first machine is the same as that of the second. Note also that the cost of Machine 1 should be ignored because it is a sunk cost.