Question

ABC Co. is considering replacing a machine. The original cost of the old machine currently in use is $10,000 (with accumulated depreciation of $8,000) while the purchase price of the contemplated new machine is $20,000. Annual operating costs for the current machine is $7,000/ year and estimated to be $2,600/ year for the new machine. Both machines will have an estimated remaining useful of 5 years. If sold now, the current machine would have a salvage value of $1,000 while the new machine would have a zero salvage value. Which of the following is correct?

Select one: a. The current machine should not be replaced as the incremental analysis indicates that net income for the 5 year period will be $3,000 lower.

b. The current machine should be replaced as the incremental analysis indicates that net income for the 5 year period will be $3,000 higher.

c. None of the above

Answer 1