Kinder Enterprises relies heavily on a copier machine to process its paperwork. Recently the copy clerk has not been able to process all the necessary copies within the regular work week. Management is considering updating the copier machine with a faster model. Current Copier New Model Original purchase cost $10,000 $20,000 Accumulated depreciation 8,000 — Estimated operating costs (annual) 7,000 2,600 Useful life 5 years 5 years If sold now, the current copier would have a salvage value of $1,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after five years.

Salvage or the residual value is the amount that is left after all the depreciation is expended.

The operating costs are $35,000 and $13,000.

This can be estimated as:

Operating costs (annual) = $7,000 and $2,600

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After five years:

Operating costs = $7,000 x 5 years = $35,000

Operating costs = $2,600 x 5 years = $13,000

The cumulative accounting shows that net revenue for the five years will be $3,000 more increased by substituting the current copier.

Therefore, $35,000 and $13,000 are the operating costs.

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Operating costs = $7,000 x 5 years = $35,000

Operating costs = $2,600 x 5 years = $13,000

Explanation:

Operating costs = $7,000 x 5 years = $35,000

Operating costs = $2,600 x 5 years = $13,000

The current copier should be replaced. The incremental analysis shows that net income for the five-year period will be $3,000 higher by replacing the current copier.

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