Question

Chris Co. is considering replacing an old machine. The old machine was purchased for $100,000 and has a book value of $40,000 and should last four more years. Chris Co. believes that it can sell the old machine for $40,000. The new machine cost $80,000 and will have a 4-year life and a $10,000 salvage value. Currently, it cost $20,000 annually to operate the old machine. The new machine is more efficient and should reduce operating cost by 25%. Based on quantitative analysis, calculate the relevant costs and indicate if Chris Co. should replace the old machine? Pleas show your work.

Multiple choice question.

No, because the relevant cost of the new machine is $20,000 more than the old machine.

No, because the relevant cost of the new machine is $10,000 more than the old machine.

Yes, because the relevant cost of the new machine is $10,000 less than the old machine.

Yes, because the relevant cost of the new machine is $20,000 less than the old machine.

Answer 1

Correct answer------------No, because the relevant cost of the new machine is $10,000 more than the old machine.

.

Working

	Retain Equipment	Replace Equipment	Net income Increase (Decrease)
Variable manufacturing costs	$     80,000	$       60,000	$       20,000
New machine cost		$       80,000	$    (80,000)
Sell old machine		$     (40,000)	$       40,000
Salvage of new machine		$     (10,000)	$       10,000
Total	$     80,000	$       90,000	$    (10,000)