Chambers Company bought Machine 1 on March 5, Year 1, for $5,000 cash. The
estimated salvage was $200 and the estimated life was 11 years. On March 5, Year 2, the
company learned that it could purchase a different machine for $8,000 cash. It would save
the company an estimated $250 per year. The new machine would have no estimated
salvage and an estimated life of 10 years. The company could sell Machine 1 for $3,000 on
March 5, Year 2. Ignoring income taxes, which of the following calculations would best assist
the company in deciding whether to purchase the new machine?
(Present value of an annuity of $250) + $3,000 - $8,000
The sale of the first machine for $3,000 and the purchase of the new machine for $8,000
on 3/5/Year 2 results in an incremental cost of $5,000. If the present value of the future
savings from the second machine (present value of an annuity of $250) exceeds $5,000, the
company should purchase the new machine. Note that the remaining estimated useful life of
the first machine is the same as that of the second. Also, the cost of Machine 1 should be
ignored because it is a sunk cost