Mountain Gear has been using the same machines to make its name-brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $250,000. The old machines presently have a book value of $125,000 and a market value of $17,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $150,000 and have operating expenses of $17,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $35,000 a year. The new machines are expected to increase quality, justifying a price increase and thereby increasing sales revenue by $15,000 a year. Select the true statement.

Question

Quizplus · Accepted Answer

The calculation for the net benefit of replacing the old equipment involves comparing the total costs and benefits over the 5-year period. The savings in operating expenses ($35,000 - $17,000 = $18,000 per year), plus the additional revenue ($15,000 per year), minus the loss from selling the old machines at their current market value instead of their book value ($125,000 - $17,000 = $108,000), and the cost of the new machines ($150,000) need to be considered. Over 5 years, the savings and additional revenue amount to ($18,000 + $15,000) * 5 = $165,000. Subtracting the net loss from selling the old machines and the cost of the new machines ($165,000 - $108,000 - $150,000) results in a net benefit of $32,000.

Mountain Gear Has Been Using the Same Machines to Make