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 and it should be replaced.

To determine whether Tesla should keep the old machine or replace it with a new one, we will compare the total costs of keeping the old machine over the next nine years with the cost of the new machine. We'll break down both options into their respective costs:

### 1. **Cost of Keeping the Old Machine:**

- **Current Book Value**: This is a sunk cost and will not be included in future decisions.
- **Operating Expenses**: $60,000 per year for 9 years.
- **Remaining Value** (Salvage Value after 9 years): $20,000.
- **Current Disposal Value**: If the machine is sold today, it could be sold for $170,000.

#### Calculation of Keeping the Old Machine:

- **Operating Expenses** over 9 years: 
  \[
  60,000 \times 9 = 540,000
  \]

- **Lost Value** (disposal value lost by keeping the machine instead of selling it now):
  \[
  170,000 - 20,000 = 150,000
  \]

- **Total Costs of Keeping the Old Machine**:
  \[
  540,000 \ (\text{operating costs}) + 150,000 \ (\text{lost disposal value}) = 690,000
  \]

### 2. **Cost of Buying the New Machine:**

- **Purchase Price**: $480,000.
- **Operating Expenses**: $26,000 per year for 9 years.
- **Salvage Value** after 9 years: $130,000.

#### Calculation of Buying the New Machine:

- **Operating Expenses** over 9 years: 
  \[
  26,000 \times 9 = 234,000
  \]

- **Net Cost** (after accounting for salvage value):
  \[
  480,000 - 130,000 = 350,000
  \]

- **Total Costs of the New Machine**:
  \[
  350,000 \ (\text{purchase price after salvage value}) + 234,000 \ (\text{operating costs}) = 584,000
  \]

### 3. **Comparison**:
- Total cost of keeping the old machine: **$690,000**
- Total cost of buying the new machine: **$584,000**

Since the total cost of buying the new machine is **$584,000**, which is **$106,000 less** than the cost of keeping the old machine (**$690,000**), it would be more cost-effective for Tesla to replace the old machine.

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### Summary:
Tesla should replace the old machine with the new one, as it would save **$106,000** over the next nine years.

Would you like more details on the calculation steps or the reasoning behind these decisions?

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Here are five questions to consider:
1. How does the straight-line depreciation affect the current book value of the old machine?
2. What is the impact of salvage value on the total cost of both machines?
3. How does operating expense difference affect the decision over a shorter period of time?
4. Could maintenance costs play a significant role in future decisions?
5. How would tax implications change if there were tax benefits for depreciation?

**Tip:** Always consider both the operating costs and the salvage value when deciding between keeping an old machine or purchasing a new one.

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. Calculate the total costs in keeping the old machine. The cost of new machine is $584,000 and it should be replaced.

This problem involves comparing the total cost of keeping an older machine versus purchasing a new replacement machine for Tesla. Using concepts like operating expenses, salvage value, and cost analysis, the solution shows that replacing the old machine could save Tesla $106,000 over the next nine years.

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