The Mendez Company Is Trying to Decide Whether to Replace

Essay

The Mendez Company is trying to decide whether to replace a packing machine that it uses to pack salsa into individual serving size packages.The following information is provided:
$\begin{array}{lrr}\text { Current machine: }\\ \text {Original cost } &\$26,000\\ \text { Accumulated depreciation } &16,000\\ \text {Annual operating costs } &4,000\\ \text {Current salvage value } &4,000\\ \text {Salvage value at the end of five vears } &1,000\\\\\text { New machine: }\\ \text { Cost } &\$16,000\\ \text { Annual operating costs} &1,000\\ \text { Salvage value at the end of five years} &1,000\\\end{array}$
Required:
1)Compute the increase or decrease in total net income over the five-year period if the company chooses to buy the new machine.
2)Compute the impact on the company's net income in the first year if the current machine is replaced.Do not take depreciation into account.
3)Under what circumstances might a manager not take the action that is in the best interest of the firm in the long run?