Answer in Full. 1. A firm has to make a decision whether to replace a machine or
ID: 1186629 • Letter: A
Question
Answer in Full.
1. A firm has to make a decision whether to replace a machine or keep it for 7 more years. It has identified 5 alternatives:
a. Spend $44K on repairs now and charge it as an one-time annual operating expense for this taxation year. Current operating expenses would remain the same.
b. Replace the machine with a new one costing $49K. Depreciation would be SL to zero over the 7 years of its life. Operating costs would be reduced by $6Kpa.
c. Spend $56K to buy specialized equipment which would reduce operating costs by $12Kpa. The machine would be depreciated 7 years using SOYD with no salvage value.
d. Replace the machine with a new one costing $49K. Depreciation would be SL to zero over the 7 years of its life. Operating costs would be reduced by $7Kpa.
e. Do nothing. Annual operating costs would increase $8Kpa.
Explanation / Answer
C should be the answer since it will be the most optimum option which save 24$ throughout the 7 year life of machine, the second best answer would be D.