Question

Rory Company has a machine with a book value of $121,000 and a remaining five Calculate the incremental income.-year useful life. A new machine is available at a cost of $120,000, and Rory can also receive $73,000 for trading in its old machine. The new machine will reduce variable manufacturing costs by $18,000 per year over its five-year useful life.Calculate the incremental income.

Answer 1

Answer:

The incremental income over five-year useful life of the new machine is $(78,000).

Explanation:

Incremental income over five-year useful life of the new machine is equal to the total of each profit&loss item below:

+ Loss on the sell of old machine = Selling price of the old machine - Book value of the old machine = 73,000 - 121,000 = $(48,000)

+ Depreciation expenses of new machine during 5 years = Cost of of the machine = $(120,000)

+ Variable cost savings during five year = 18,000 x 5 = $90,000.

=> Incremental income of replacing the old machine by the new one = (48,000) + (120,000) + 90,000 = $(78,000).

So, the result is $(78,000).