Boston Bakers
Boston Bakers is trying to decide whether it should keep its existing bread-making machine or purchase a new one that has technological advantages (which translate into cost savings)over the existing machine.Information on each machine follows:
$\text {\underline{ Old machine} }$ &nbsp$\text {\underline{ New machine} }$
$\begin{array}{lll}
\text { Original cost } & \$ 10,000 && \$ 25,000 \
\text { Accumulated depreciation } & 6,000 && 0 \
\text { Annual cash operating costs } & 9,500& & 5,000 \
\text { Current salvage value of old machine } & 2,500 & \
\text { Salvage value in } 10 \text { years } & 650 && 1,200 \
\text { Remaininglife } & 12\text { yrs } &&12 yrs
\end{array}$

Refer to Boston Bakers.The estimated $650 salvage value of the existing machine in 10 years represents a(n)
A)sunk cost.
B)opportunity cost of selling the existing machine now.
C)opportunity cost of keeping the existing machine for 10 years.
D)opportunity cost of keeping the existing machine and buying the new machine.

Question

Boston Bakers
Boston Bakers is trying to decide whether it should keep its existing bread-making machine or purchase a new one that has technological advantages (which translate into cost savings)over the existing machine.Information on each machine follows:
                                                                       $\text {\underline{ Old machine} }$ &nbsp$\text {\underline{ New machine} }$
$\begin{array}{lll}
\text { Original cost } & \$ 10,000 && \$ 25,000 \
\text { Accumulated depreciation } & 6,000 && 0 \
\text { Annual cash operating costs } & 9,500& & 5,000 \
\text { Current salvage value of old machine } & 2,500 & \
\text { Salvage value in } 10 \text { years } & 650 && 1,200  \
\text { Remaininglife } & 12\text { yrs } &&12 yrs
\end{array}$

Refer to Boston Bakers.The estimated $650 salvage value of the existing machine in 10 years represents a(n)
A)sunk cost.
B)opportunity cost of selling the existing machine now.
C)opportunity cost of keeping the existing machine for 10 years.
D)opportunity cost of keeping the existing machine and buying the new machine.

Quizplus · Accepted Answer

The estimated $650 salvage value of the existing machine in 10 years represents the opportunity cost of selling the existing machine now since it is the value that could be received if the machine is sold now instead of keeping it for another 10 years.

The best choice would be to purchase the new machine since it has lower annual cash operating costs and technological advantages that translate into cost savings over time. Additionally, the salvage value of the old machine is decreasing over time and the accumulated depreciation is already at $6,000, making it less valuable to keep the old machine. The cash flow analysis should be conducted to determine the net present value of the decision to purchase the new machine.

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Boston Bakers
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