Amanda Company is considering the replacement of a machine that is presently used in production.The following data are available:
$\begin{array}{lll}&\text { Old Machine }&\text { NEW Machine }\
\text { Original cost } & \$ 200,000 & \$ 160,000 \
\text { Useful life in years } & 10 & 5 \
\text { Current age in years } & 5 & 0 \
\text { Book value } & \$ 100,000 & -\\text { Disposal value now } & \$ 32,000 & - \
\text { Disposal value in } 5 \text { years } & 0 & 0 \
\text { Annual cash operating costs } & \$ 20,000 & \$ 14,000
\end{array}$
Adding all five years together,the total relevant costs to consider if the new machine is purchased is ________.
A) $70,000
B) $100,000
C) $198,000
D) $230,000

Question

Quizplus · Accepted Answer

The total relevant costs for the new machine over five years include the purchase cost, the disposal value of the old machine that is forgone, and the annual operating costs. Purchase cost of the new machine is $160,000. The disposal value of the old machine that is forgone is $32,000 (since this amount could have been received but won't be if the new machine is purchased). The annual operating costs of the new machine are $14,000 per year for 5 years, totaling $70,000 ($14,000 * 5). Adding these together: $160,000 (purchase cost) + $32,000 (forgone disposal value of the old machine) + $70,000 (operating costs) = $262,000. However, since the question asks for the total relevant costs considering the new machine, we should not include the forgone disposal value as a cost to purchase the new machine; it's a sunk cost of the old machine. Thus, the correct calculation should only include the purchase cost and the operating costs: $160,000 + $70,000 = $230,000. It seems there was a mistake in my explanation regarding the inclusion of the disposal value as a relevant cost. The correct relevant costs should indeed include the purchase price of the new machine and its operating costs over five years, without subtracting the disposal value of the old machine as a cost but considering it as a part of the decision-making process.

Amanda Company Is Considering the Replacement of a Machine That