Question

Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The five-year differential effect on profit from replacing the machine is a(n)

Answer 1

Answer: increase of $11,000

Explanation:

Based on the information that have been provided in the question, the five-year differential effect on profit from replacing the machine will be:

= $25000 - [5 × ($26,000 - $23,500)] - $1500

= $25,000 - (5 × $2500) - $1500

= $25,000 - $12,500 - $1,500

= $25,000 - $14,000

= $11,000

Therefore, there will be an increase of $11,000.