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:

Answer 1

Answer: $36,000 increase.

Explanation:

Cost of keeping Current Truck.

The cost of keeping the current truck will be the Opportunity Cost of not purchasing the New truck.

The New truck is capable of reducing Manufacturing costs by $25,000 a year for 5 years so,

Cost of Keeping Current Truck = 25,000 * 5

= $125,000

Cost of buying new truck

It is given that if the company trades in the old truck they get a $31,000 reduction.

The Cost Price of the new truck is therefore,

= 120,000 - 31,000

= $89,000

The difference between the costs will be,

= 125,000 - 89,000

= $36,000

If buying a new truck will reduce expenses by $36,000 then that means it will increase income by $36,000.