To assist Tesla management in deciding whether to keep the old machine or buy a replacement, we need to calculate the total costs of keeping the old machine for the next nine years.

Information Summary:

• Old Machine:

  • Purchase Price (3 years ago): $720,000
  • Current Book Value: $400,000
  • Current Disposal Value: $170,000
  • Remaining Value (after 9 years): $20,000
  • Annual Operating Expenses: $60,000

• New Machine:

  • Purchase Price: $480,000
  • Expected Salvage Value (after 9 years): $130,000
  • Annual Operating Expenses: $26,000

• Total cost of new machine: $584,000

Step-by-Step Calculation for Keeping the Old Machine

1. Operating Costs (over 9 years): The annual operating expenses for the old machine are $60,000 per year. Over the next 9 years, this adds up to: $60,000 \times 9 = 540,000$

2. Opportunity Cost of Keeping the Old Machine: If Tesla keeps the old machine, it forgoes the opportunity to sell it for its current disposal value of $170,000. This is considered an opportunity cost.

3. Net Disposal Value after 9 years: The remaining value of the old machine after 9 years is estimated to be $20,000.

4. Depreciation (loss of value over 9 years): The depreciation for the old machine can be calculated by subtracting the value after 9 years ($20,000) from the current disposal value ($170,000): $170,000 - 20,000 = 150,000$

Total Costs of Keeping the Old Machine

Now, we sum up all the costs involved in keeping the old machine:

1. Operating Costs: $540,000
2. Opportunity Cost (lost disposal value): $170,000
3. Depreciation Loss: $150,000

Thus, the total cost of keeping the old machine is: $540,000 + 170,000 + 150,000 = 860,000$

Conclusion:

• Cost of keeping the old machine: $860,000
• Cost of buying the new machine: $584,000

The total cost of keeping the old machine ($860,000) is higher than the cost of buying the new machine ($584,000). Therefore, it would be more cost-effective for Tesla to buy the replacement machine.

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Would you like further clarification or details on any step?

Here are 5 related questions you may find useful:

1. How does salvage value impact the total cost of an asset over its useful life?
2. What are the financial benefits of switching to a machine with lower operating expenses?
3. How does straight-line depreciation affect the book value of machinery over time?
4. What are the key factors to consider in calculating opportunity costs?
5. How could maintenance costs influence the decision between keeping and replacing equipment?

Tip: Consider non-financial factors like efficiency, reliability, and potential downtime when evaluating equipment replacement decisions.