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Ridley Company Retain or Replace Equipment

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Ridley Company has a factory machine with a book value of $83,200 and a remaining useful life of 4 years. A new machine is available at a cost of $207,900. This machine will have a 4-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $616,500 to $430,000.

Prepare an analysis showing whether the old machine should be retained or replaced. (If an amount reduces the net income for Increase (Decrease) column then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000). Enter all other amounts in all other columns as positive and subtract where necessary.)

Retain Equipment Replace Equipment Net 4-Year Income Increase
(Decrease)

Variable manufacturing costs

New machine cost

Total

The old factory machine should be replaced or retained?

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Solution Preview

We assume that the old machine can be sold at its book value of $83,200. If the company buys the new machine, it is assumed that the company will simultaneously sell the old machine for $83,200. Since the new ...

Solution Summary

Answered in 134 words. An Excel file showing all computations is provided.

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