Mountain Lumber Corporation Uses a Machine That Removes the Bark

Essay

Mountain Lumber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable resulting in significant downtime and wasted labor costs. Management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines:
Old Machine New Machine
Original purchase cost $325000 $405000
Accumulated depreciation 230000 -
Estimated life 4 years 4 years
It is estimated that the new machine will produce annual cost savings of $107000. The old machine can be sold to a scrap dealer for $12000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives.
Instructions
Determine whether the company should purchase the new machine.