Question

Sorrentino, Inc., is considering disposing of a machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered as a replacement. The new machine will have a three year useful life and no residual value. It is estimated that annual manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. Ignoring the time value of money, the best decision is to:

	A.	keep the old equipment at a net advantage of $7,500
	B.	keep the old equipment at a net advantage of $8,750
	C.	buy the new equipment at a net advantage of $7,500
	D.	buy the new equipment at a net advantage of $8,750

Answer 1

Correct answer---(D) buy the new equipment at a net advantage of $8,750

Working

	Keep old machine	Replace old machine	Benefit
Purchase cost		$      68,750.00
Sale of Old machine		$      (6,250.00)
Manufacturing cost	$    1,31,250.00	$      60,000.00
Net cost	$    1,31,250.00	$ 1,22,500.00	$ 8,750.00

Manufacturing cost is for 3 years