## (solution) I need the answers to this spreadsheet, gray boxes only.

SHAMROCK MANUFACTURING

Facts:

Old machine historical cost

Old machine current book value

Remaining useful life of asset (2 years)

Annual depreciation

straight-line depreciation method

Market value

Salvage value at end of useful life \$150,000 New equipment

60,000 Useful life of new equipment (2 years) \$90,000 \$30,000 Annual depreciation

\$45,000

straight-line depreciation method

\$36,000 Annual reduction in direct MFG labor costs

\$15,000

Annual reduction in electricity

\$17,500

0 Salvage value at end of useful life

0

YEAR ONE #1

Cash operating costs

Direct manufacturing costs

Electricity

Depreciation

Loss on disposal of old machine

Total costs New

Equipment

(replace) Old

Equipment

(keep) Cost

Difference by

replacing \$0 (\$15,000)

(17,500)

0

24,000

(\$8,500) (\$15,000)

(17,500)

24,000

(\$8,500) Discuss #1 and #2 in the

analytical section of your

case analysis. YEAR TWO #2

Cash operating costs

Direct manufacturing costs

Electricity

Depreciation

Current disposal price of old machine

Total relevant cash flow #3 New

Equipment

(replace) Old

Equipment

(keep) (35,000)

(36,000)

(\$71,000) &quot;WHAT IF&quot; THE NEW MACHINE ONLY COST --&gt;?

WITH THE SAME 2 YEAR USEFUL LIFE 0

\$0 Cash Outflow

by replacing

\$0

(35,000)

0

(36,000)

(\$71,000) Note: The book value of the

old machine \$60,000 would

be written off as depreciation

over 2 years under the keep

option, or all at once in the

current year under replace

option so net effect is the

same, so it is irrelevant in

this analysis \$77,000

YEAR ONE New

Equipment

(replace)

Cash operating costs

Direct manufacturing costs

Electricity

Depreciation

Loss on disposal of old machine

Total costs Old

Equipment

(keep) (17,500)

24,000

\$6,500 \$0 Cost

Difference by

replacing

\$0

(17,500)

0

24,000

\$6,500 Compare #1 and #2 to the

&quot;what if&quot; results in #3 in the

analytical section of your

case analysis. YEAR TWO

New

Equipment

(replace)

Cash operating costs

Direct manufacturing costs

Electricity

Depreciation

Current disposal price of old machine

Total relevant cash flow Old

Equipment

(keep) \$0 (36,000)

(\$36,000) 0

\$0 Cash Outflow

by replacing

\$0

0

0

(36,000)

(\$36,000) In the conclusion section

decision should be

Solution details:

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Approved

Sep 13, 2020

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