BUY A NEW MACHINE OR REPAIR AN OLD ONE INCREMENTAL ANALYSIS
Cedar Shakes, Inc., makes a variety of cedar siding materials for houses. It is facing a major problem with one of its key machines. Specifically, it will either have to overhaul the machine, at a cost of $1,000,000, which will give it five more years of life and reduce maintenance costs by 15%, or buy a new machine, which will cost $2,500,000 and operate for 10 years. The new machine would be more efficient, using two less labor workers at $30,000 per year. It would take up less space in the factory, although there is no use for this space right now. Finally, it would use 10% less electricity (currently $20,000 per year) and need 25% less maintenance (currently $50,000 per year). There will be no salvage for the old machine.
a. Calculate the total costs per year to run the existing machine if it is overhauled.
b. Calculate the total costs per year faced if the existing machine is replaced.
c. What would you recommend to management? Why? Would there be any qualitative concerns you would have?