Question

arett Motors is trying to decide whether it should keep its existing car washing machine or purchase a new one that has technological advantages (which translate into cost savings) over the existing machine. Information on each machine follows: Old machine New machine Original cost $9,000 $20,000 Accumulated depreciation 5,000 0 Annual cash operating costs 9,000 4,000 Current salvage value of old machine 2,000 Salvage value in 10 years 500 1,000 Remaining life 10 yrs 10 yrs Refer to Jarett Motors. The $4,000 of annual operating costs that are common to both the old and the new machine are an example of a(n) Select one: a. opportunity cost b. irrelevant cost c. future avoidable cost d. sunk cost

Answer 1

Answer:

Jarett Motors

The $4,000 of annual operating costs are an example of an

a. opportunity cost

Explanation:

a) Data and Calculations:

                                                        Old machine    New machine

Original cost                                        $9,000              $20,000

Accumulated depreciation                    5,000              0

Annual cash operating costs                9,000                  4,000

Current salvage value of old machine 2,000

Salvage value in 10 years                         500                  1,000

Remaining life                                        10 yrs                  10 yrs

b) The annual operating costs are an example of opportunity cost because the alternative with the old machine will incur an annual operating cost of $9,000 instead of $4,000 with the new machine.  This will translate to a forgone benefit of $5,000 ($9,000 - $4,000) in cost saving if the new machine is purchased.