An old machine that originally cost $9,500 thus far has accumulated depreciation
ID: 2345772 • Letter: A
Question
An old machine that originally cost $9,500 thus far has accumulated depreciation of $1,900. The remaining useful life is four years, with no salvage value at the end of its useful life. A new machine is now available that costs $8,500, with a useful life of five years and no residual value. The old machine could be sold now for $5,900. The annual cash operating costs for the old machine are $5,000, but for the new machine they would be only $2,500. Gross revenue from the products would be $12,000 annually for either machine. The company shoulda. keep the old machine to avoid a $5,900 loss on its disposal.
b. keep the old machine to avoid an $8,500 decrease in cash.
c. keep the old machine to avoid a $1,700 loss on its disposal.
d. replace the old machine.
***PLEASE EXPLAIN****
Explanation / Answer
D. Replace the machine. The first year, they would pay 8500 for the new machine, receive 5900 for the sale of the old machine and operating costs would be 2500 less. This would be $100 decrease in cash for the first year, but the following years, there would be an increase in cash of $2500 (because of the decrease in operating expenses)