(Asset replacement) The manager of the Plastics Fabrication Division of Gulf Chemical Corp., Kathy Johnson, has heard about a new extruding machine that could replace one of her existing machines. The manufacturer has suggested to Ms. Johnson that the new machine would save $90,000 per year in the costs of operations. Ms. Johnson’s controller compiled additional information as follows:
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OLD MACHINE |
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Original cost |
$375,000 |
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Present book value |
$250,000 |
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Annual cash operating costs |
$250,000 |
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Market value now |
$50,000 |
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Market value in 5 years |
$0 |
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Remaining useful life |
5 years |
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NEW MACHINE |
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Cost |
$450,000 |
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Annual cash operating costs |
$150,000 |
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Market value in 5 years |
$0 |
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Useful life |
5 years |
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a. Based on financial considerations alone, should Ms. Johnson purchase the new machine? Show computations to support your answer.. What qualitative factors should Ms. Johnson consider before making a decision about purchasing the new machine?