Pharoah Company has a factory machine with a book value of $90,800 and a remaining useful life of 7 years. It can be sold for $27,200. A new machine is available at a cost of $407,400. This machine will have a 7-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $640,100 to $581,800. Prepare an analysis showing whether the old machine should be retained or replaced. (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e. g. -45 or parentheses e. g. (45).)

Analysis of Total cost over the period of 7 years

                                                             Retain Old    Buy New        Total

1.Variable Operating Cost                   $640,100     $581,800       ($58,300)

2.Old Machine Book Value

Retain; Annual Depreciation                  $12,971           $0              ( $12,971)

Replace: Lump sum Written Off               $0             $90,800        $90,800

3.Old Machine Disposal Value                 $0            ($27,200)     ($27,200)

4.Initial Purchase Cost New                     $0            $407,400     $407,400

Total Cost                                             $653,071      $1052,800   $399,729

Explanation:

Replacement of Machine is a Capital Investment or Long term decision.One aspect of asset replacement is how to deal with book value (written down value) of old equipment.

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