Question

Franke Timber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines: Old Machine Original purchase cost $410,000 Old Machine Accumulated depreciation 280,000 New machine cost $520,000 Estimated life for both is 5 yearsIt is estimated that the new machine will produce annual cost savings of $110,000. The old machine can be sold to a scrap dealer for $10,000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives. Should Franke purchase the new machine?

	A.	No-retain old machine to avoid $520,000 cost of new machine.
	B.	Yes-purchase new machine because there will be a net cost savings of $10,000.
	C.	Yes-purchase new machine because there will be a net cost savings of $30,000.
	D.	Yes-purchase new machine because there will be a net cost savings of $40,000.

Answer 1

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