Question

LC Corp. has an old machine with operating costs of $164,200 per year and a net book value of $23,000. LC is looking at two replacement options. Option A costs $210,000 and has $118,000 per year of operating costs. Option B costs $216,000 and has $114,400 of annual operating costs. All machines have a six year life and a $0 salvage value. The old machine could be sold for $19,200 today. Which of the following lists LC’s options from least costly to most costly?A : Retaining the old machine is least costly, followed by option B, then option A.B :Option B is least costly, followed by option A, then retaining the old machine.C :Retaining the old machine is least costly, followed by option A, then option B.D :Option A is the least costly, followed by option B, then retaining the old machine.

Answer 1

Answer:

B :Option B is least costly, followed by option A, then retaining the old machine

Explanation:

The computation for each machine is shown below:

Old machine:

= Per year operating cost × number of years - salvage value

= $164,200 × 6 years - $19,200

= $985,200 - $19,200

= $966,000

Option A:

= Purchase Cost + Per year operating cost × number of years

= $210,000 + $118,000 × 6 years

= $210,000 + $708,000

= $918,000

Option B:

= Purchase Cost + Per year operating cost × number of years

= $216,000 + $114,400 × 6 years

= $216,000 + $686,400

= $902,400

By comparing the three machines, we get to know that the option B is least cost out of the available options