Question

Granfield Company has a piece of manufacturing equipment with a book value of $36,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $21,200. Granfield can purchase a new machine for $112,000 and receive $21,200 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $18,200 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is ______

Answer 1

Answer:

Effect on income= -$18,000

Explanation:

Giving the following information:

Granfield Company has a piece of manufacturing equipment with a book value of $36,000 and a remaining useful life of four years. At the end of the four years, the equipment will have a zero salvage value. The market value of the equipment is currently $21,200. Granfield can purchase a new machine for $112,000 and receive $21,200 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $18,200 per year over the four-year life of the new machine.

Year 0= -112,000 + 21,200= -90,800

Year 1 to 4= 18,200*4= 72,800

Effect on income= -90,800 + 72,800= -18,000