A Replacement Project Involves the Purchase of a New Machine

question 196

Essay

A replacement project involves the purchase of a new machine for $100,000 that will be depreciated over 10 years.  The old machine was purchased six years ago for $60,000 and was depreciated using a 15 year life.  Both machines use straight line depreciation, including the half-year convention.  What will the incremental depreciation expense be in the first year of the project if the old machine is sold and the new machine is purchased?  What will it be in the second year of the project?

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Definitions:

Standard Residuals

Residuals that have been standardized to have a mean of 0 and a standard deviation of 1, useful for identifying outliers in regression analysis.

Standard Deviation

A statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance.

Simple Linear Regression

Simple Linear Regression is a statistical method to model the relationship between a single independent variable and a dependent variable by fitting a linear equation.

Sample Correlation Coefficient

A measure that indicates the degree of linear relationship between two variables in a sample, ranging between -1 and 1, where 1 means a perfect positive correlation and -1 a perfect negative correlation.