Oscar Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: $\begin{array}{lll}&\text { Old Machine}&\text { New Machine }\
\text { Cost } & \$ 250,000 & \$ 500,000 \
\text { Accumulated Depreciation } & 75,000 & -0 \text { - } \
\text { Remaining useful life } & 10 \text { years } & -0 \text { - } \
\text { Useful life } & -0 \text { - } & 10 \text { years } \
\text { Annual operating costs } & \$ 200,000 & \$ 150,500
\end{array}$ If the old machine is replaced it can be sold for $20000. The net advantage (disadvantage) of replacing the old machine is
A) $15000
B) $20000
C) $(5000)
D) $(50000)

Question

Quizplus · Accepted Answer

The net advantage of replacing the old machine is the present value of the savings in operating costs over the remaining life of the old machine, less the cost of the new machine plus the salvage value of the old machine.The present value of the savings in operating costs is:$$PV = \frac{A}{r} * (1 - (1 + r)^{-n})$$where:* A is the annual savings in operating costs ($50,000)* r is the discount rate (10%)* n is the number of years (10)$$PV = \frac{50,000}{0.10} * (1 - (1 + 0.10)^{-10})$$$$PV = $380,773$$The net advantage of replacing the old machine is:$$PV - (Cost of new machine - Salvage value of old machine)$$$$= $380,773 - ($500,000 - $20,000)$$$$= $15,773$$

Oscar Co Is Contemplating the Replacement of an Old Machine with with a New