Question

ISooky has a spotter truck with a book value of $40,000 and a remaining useful life of five years. At the end of the five years the spotter truck will have a zero salvage value. The market value of the spotter truck is currently $32,000. iSooky can purchase a new spotter truck for $120,000 and receive $31,000 in return for trading in its old spotter truck. The new spotter truck will reduce variable manufacturing costs by $25,000 per year over the five-year life of the new spotter truck. The total increase or decrease in income by replacing the current spotter truck with the new truck (ignoring the time value of money) is:
a. $31,000 decrease
b. $36,000 decrease
c. $31,000 increase
d. $120,000 decrease
e. $36,000 decrease
f. $36,000 increase
g. $120,000 decrease
h. $36,000 increase

Answer 1

Answer:

$36,000 increase

Explanation:

For computing the increase or decrease in income, first we have to determine the net cash outflow which is shown below:

Net cash outflow = Purchase of new spotter truck - sale value of old truck

                            = $120,000 - $31,000

                            = $89,000

Now the increase or decrease would be

= Variable manufacturing cost for five years - net cash outflow

= $25,000 × 5 years - $89,000

= $125,000 - $89,000

= $36,000 increase