Starling Co. is considering disposing of a machine with a book value of $21,100

Question

Starling Co. is considering disposing of a machine with a book value of $21,100 and estimated remaining life of five years. The old machine can be sold for $5,300. A new high-speed machine can be purchased at a cost of 68,000. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $22,500 to $20,100 the new machine is purchased. The differential effect on income for the new machine for the entire five years is decrease of 50,700 decrease of $65,910 increase of $65,910 increase of $50,700

Explanation / Answer

Q1. Decrease of $ 50700 Explanation: Annual Cost reduction 2400 Number of years of life 5 Total Savings in cost 12000 Add: Salvage value of old machine 5300 Total Inflows 17300 Less: Investment 68000 Net decrease in income -50700 Q2. Annual maintenance cost reduction 10450 Number of years applicable 5 Total Differential decrease in cost 52250 Proceeds from sale of old equipment 9510 61760 Cost of new equipment 54350 Net differential decrease in cost 7410

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