Tesla management are trying to decide whether to keep an older piece of machinery or buy a replacement. Management was presented with the following information to assist in their decision:

The old machine was purchased three years ago for $720,000 and has a current book value using straight-line depreciation of $400,000.
The old machine incurs operating expenses of $60,000 per year.
The current disposal value of the old machine is $170,000; if it is kept nine more years, its remaining value would be $20,000.
The replacement machine would cost $480,000 and have a useful life of nine years.
The replacement machine has an expected salvage value of $130,000 after nine years.
The replacement machine would require $26,000 per year in operating expenses.
Required
Calculate the total costs in keeping the old machine. The cost of new machine is $584,000

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.

---

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.

Tesla management are trying to decide whether to keep an older piece of machinery or buy a replacement. Management was presented with the following information to assist in their decision: The old machine was purchased three years ago for $720,000 and has a current book value using straight-line depreciation of $400,000. The old machine incurs operating expenses of $60,000 per year. The current disposal value of the old machine is $170,000; if it is kept nine more years, its remaining value would be $20,000. The replacement machine would cost $480,000 and have a useful life of nine years. The replacement machine has an expected salvage value of $130,000 after nine years. The replacement machine would require $26,000 per year in operating expenses. Required: Calculate the total costs in keeping the old machine. The cost of new machine is $584,000.

Analyze the decision between keeping an old machine versus purchasing a new one for Tesla management. Learn how to calculate operating costs, opportunity cost, and depreciation over time. The total cost of keeping the old machine is $860,000, compared to $584,000 for a new machine, making replacement more cost-effective.

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