Question

Dinkins Inc. is considering disposing of a machine with a book value of $50,000 and an estimated remaining life of five years. The old machine can be sold for $15,000. A new machine with a purchase price of $150,000 is being considered as a replacement. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $70,000 to $45,000 if the new machine is purchased.
Determine the net differential increase or decrease in cost for the entire five years for the new equipment.

Answer 1

Answer:

$10,000 increase

Explanation:

The computation of the net differential increase or decrease in cost for the entire five years for the new equipment is as follows:

Particulars                     Keep the    Replace the   Effect on Cost  

                                   old mach.    new mach.  

Cost of 5 years             350,000     225000                     -125000.00  

Investment in new machine 0            150000.00                150000.00  

Salvage value of old machine 0    -15000.00                 -15000.00  

Increase in cost               350,000        360000.00            10000.00