Question

Melody and Harmony apparel has been using the same machines to make its apparel for the last five years. Leah, a cost-efficiency consultant based in suburbs on Chicago, has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $210,000. The old machines presently have a book value of $121,000 and a market value of $13,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $110,000 and have operating expenses of $19,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $31,000 a year. The new machines are expected to increase quality, justifying a price increase and thereby increasing sales revenue by $11,000 a year. Select the true statement.

• The company will be $42,000 better off over the 5 year period if it keeps the old equipment.

• The company will be $13,000 better off over the 5 year period if it replaces the old equipment.

• The company will be $29,000 better off over the 5 year period if it replaces the old equipment.

• The company will be $18,000 better off over the 5 year period if it replaces the old equipment.

Answer 1

Answer :- The company will be $18,000 better off over the 5 year period if it replaces the old equipment.

Workings

Total Savings in Cost
New Machine (Operating Exp) a	19000
Increase in revenue b	11000
Net Exp (new machine) a-b A	8000
Old Machine (Operating Exp) c	31000
Total Savings in Expense per year c-A B	23000
Total Savings in expense for 5 year B*5 C	115000
Market Value of Old Machine d	13000
Total Savings in Replacement C-d D	128000
less: Purchase Cost of Machine e	110000
Net Savings	18000

ie The company will get net benefit of $18000 in this replacement