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  3. a proposal has been made to purchase a new machine...

Question: a proposal has been made to purchase a new machine...

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A proposal has been made to purchase a new machine and scrap the current machine at a zero salvage value. The new machine will have a production rate that is 20% faster than the current equipment, whose production rate = 12 parts per hour. Each part has a starting material cost = $1.33 and a selling price = $6.40. All parts produced during the next four years on either machine can be sold at this price. At the end of the four years, the current machine will be scrapped, but the new machine would still be productive for another six years. The new machine costs $700,000 installed, has an anticipated life of 10 years, and an applicable overhead rate of 30%. It will be used 4000 hours per year, same as the current machine. The labor rate for either alternative = $24.00/hr which includes applicable overhead costs. Assume availability = 100% and scrap rate = 0. Which alternative is more economical using total profit over four years as the criterion, (a) repairing the current machine or (b) purchasing the new machine?

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