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 mote technologically advanced machinery The old machines cost the company $100,000 The old machines presently have a book value of $60,000 and a market value of $6,000 They are expected to have a five-year remaining life and zero salvage value The new machines would cost the company $60,000 and have operating expenses of $9,000 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 $15,000 a year The new machines are expected to increase quality, justifying a price increase, and thereby increasing sales revenue by $5,000 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

Answer 1

Answer:a. The company will be $11,000 better off over the 5 year period if it replaces the old machine.

Explanation:

The purchase of the new machine will bring the annual operating expenses to $9,000 compared to the $15,000 been spent on the old machine which brings in a savings of $6000 and when this is added to the $ 5000 increase sales revenue from the new machine, it means the company will be better off by $11,000 over the next five year if it replaces the old machine.

There is no justification for being $12,000, $20,000 or $6000 better off over the next five year by either replacing or keeping the old machine.