Managers are examining a possible replacement of a machine decision and generate the following numbers:
Book value of old machine $1,00,000
Current disposal value of old machine $50,000
Loss on disposal of old machine $300,000
Cost of new machine $600,000
In performing an analysis and in attempt to answer the question, "should we replace the old machine", which of the following statements would be true
A) the book value of the old machine is relevant
B) the book value of the old machine and the current disposal value of the old machine are both relevant
C) the cost of the new machine and the current disposal value of the old machine are relevant
D) the book value of the old machine and the current disposal value of the old machine are the only relevant items

Question

Quizplus · Accepted Answer

The relevant items for the analysis are the cost of the new machine and the current disposal value of the old machine. The book value of the old machine is not relevant because it represents the historical cost of the machine and does not reflect its current value or potential for generating future cash flows. The loss on disposal of the old machine is also not relevant because it is a sunk cost that cannot be recovered and does not affect the future cash flows of the decision. Therefore, the best choice is C which includes the relevant items for the analysis.

Managers Are Examining a Possible Replacement of a Machine Decision