Question

"Mountain Gear" has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $200,000. The old machines presently have a book value of $120,000 and a market value of $12,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $100,000 and have operating expenses of $18,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $30,000 a year. The new machines are expected to increase quality, justifying a price increase, and thereby increasing sales revenue by $10,000 a year. Select the true statement.a) the company will be $11,000 better off over the 5-year period if it replaces the old equipment. b) the company will be $20,000 better off over the 5-year period if it keeps the old equipment. c) the company will be $12,000 better off over the 5-year period if it replaces the old equipment. d) the company will be $6,000 better off over the 5-year period if it replaces the old equipment.e) None of them.

Answer 1

Answer:

e. None of them

The company will be $102,000 better off over the 5 year period if it replaces the old equipment

Explanation:

The computation of given question is shown below:-

Net purchase value = New machine cost - Market value

= $100,000 - $12,000

= $88,000

Net operating expenses = Sales revenue - operating expenses × Years

= $10,000 - $18,000 × 5

= -$8,000 × 5

= -$40,000

Total expenses = Net purchase value - Net operating expenses

= $88,000 - $40,000

= $48,000

Old machine operating cost = operating expenses associated with the old machines × Years

= $30,000 × 5

=$150,000

Better off over old machine if new machine is installed = Total expenses - Old machine operating cost

= $48,000 - $150,000

= $102,000

The company will be $102,000 better off over the 5 year period if it replaces the old equipment.