Rocko Inc.has a machine with a book value of $50,000 and a five-year remaining life.A new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in the old machine.The new machine will reduce variable manufacturing costs by $14,000 per year over its five-year life.Should the machine be replaced?

A) Yes,because income will increase by $14,000 per year.
B) Yes,because income will increase by $23,000 in total.
C) No,because the company will be $23,000 worse off in total.
D) No,because the income will decrease by $14,000 per year.
E) Rocko will be not be better or worse off by replacing the machine.

Question

Michya Johnson · Accepted Answer

Final Answer : B, Explanation :  First, we need to calculate the total cost of keeping the old machine for the remaining five years.Total cost of keeping old machine = Variable manufacturing costs per year x number of years remaining= $14,000 x 5= $70,000The trade-in value of the old machine is $38,000, which means the net cost of purchasing the new machine would be:Net cost of new machine = Cost of new machine - Trade-in value of old machine= $85,000 - $38,000= $47,000Now, we need to calculate the total savings in variable manufacturing costs over the five-year life of the new machine:Total savings in variable manufacturing costs = Variable manufacturing costs per year x number of years= $14,000 x 5= $70,000Adding the savings in variable manufacturing costs to the trade-in value of the old machine, we get a total benefit of:Total benefit = Trade-in value of old machine + Savings in variable manufacturing costs= $38,000 + $70,000= $108,000Since the net cost of purchasing the new machine is $47,000, the total benefit we get is:Total benefit = $108,000 - $47,000= $61,000This means that we would be $61,000 better off if we replaced the old machine with the new one, so the answer is option B.

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