Question

Replacement Machine Old Machine Original cost $650,000 $520,000 Useful life in years 6 12 Current age in years 6 Book value $390,000 Disposal value now $112,000 $0 $0 Disposal value in 6 years Annual cash operating costs $103,000 $64,000 The difference between keeping the old machine and replacing the old machine is O A. $910,000 in favor of replacing the old machine O B. $174,000 in favor of replacing the old machine c. $910,000 in favor of keeping the old machine D. $174,000 in favor of keeping the old machine

Answer 1

Decrease in operating costs = (103,000-64,000)*6 = 234,000

Cost of purchasing new machine = 520,000 - 112,000 = 408,000

Decrease in operating income = 234,000 - 408,000

= 174,000

As there's Decrease in operating income if machine is replaced, old machine should be retained.

Option D