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Dinkins Inc. is considering disposing of a machine with a book value of $50,000 and an...

Dinkins Inc. is considering disposing of a machine with a book value of $50,000 and an estimated remaining life of five years. The old machine can be sold for $15,000. A new machine with a purchase price of $150,000 is being considered as a replacement. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $70,000 to $45,000 if the new machine is purchased.

Determine the net differential increase or decrease in cost for the entire five years for the new equipment.

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Answer #1
Net diffenrential decrease in cost over 5 years   25000

Working:

Depreciation on the new machine (150,000 / 5) A 30000
Depreciation on old machine (50,000 / 5) B 10000
Increase in cost per year (A - B) C 20000
Variable cost with old machine D 70000
Variable cost with new machine E 45000
Savings in cost per year (D - E) F 25000
Net diffenrential decrease in cost per year (F - C) G 5000
Net diffenrential decrease in cost over 5 years (F x G) H 25000
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