Question

A company purchased manufacturing equipment 5 years ago for $50,000. book value is currently $5,000 and the remaining useful life is 3 years. the equipment incurs variable manufacturing costs of $30,000. the company is considering replacing the equipment. the new equipment will cost $75,000, have a useful life of 3 years, and is more efficient and, therefore, only costs $10,000 in variable manufacturing costs to operate each year. the vendor is willing to accept the old equipment with a selling price of $20,000. the company should:

Answer 1

Since purchasing new gear will reduce cash flow by $5,000, the corporation should keep its old equipment, and the calculation can be defined as follows:

Calculating the Total decrease in net income:

The following are the costs if the company keeps the old equipment:

$\to$ $30,000 x 3 years = $90,000 So, the total cost is $90,000.

The following are the costs if the company purchases new equipment:

Calculating the equipment cost that is  

$\to$ $75,000 - $10,000 = $65,000.

$\to$ $10,000 x 3 years = $30,000. So, the total cost is $95,000.

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Answer 2

Answer: replace the old equipment because the total net increase in income will be $5000

Explanation: cost to replace new machine: [$75,000 + ($10,000 X 3 years) - $20,000] = $(85,000). Cost to keep old machine: ($30,000) X 3 = $(90,000). Company should replace the old equipment because income will increase by $5000.