(Asset replacement) Arizona Mechanical recently created a new product, a computer controlled, laser precise lathe, and Ohio Ornamental Metals is considering purchasing one. Ohio’s CFO received the following information from the accounting department regarding the company’s existing lathe and the new Arizona Mechanical lathe. The savings in operating costs offered by the new lathe would mostly derive from reduced waste, reduced labor, and energy cost savings.
|
Old Machine |
|
|
Original cost |
$875,000 |
|
Present book value |
$150,000 |
|
Annual cash operating costs |
$450,000 |
|
Market value now |
$200,000 |
|
Market value in 5 years |
$0 |
|
Remaining useful life |
5 years |
|
New Machine |
|
|
Cost |
$1,600,000 |
|
Annual cash operating costs |
$155,000 |
|
Market value in 5 years |
$0 |
|
Useful life |
5 years |
a. Based on financial considerations alone, should Ohio Ornamental Metals purchase the new lathe? Show computations to support your answer.
b. What qualitative factors should Ohio Ornamental Metals consider before making a decision about purchasing the new lathe?