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 $100,000.The old machines presently have a book value of $60,000 and a market value of $6,000.They are expected to have a five-year remaining life and zero salvage value.The new machines would cost the company $50,000 and have operating expenses of $9,000 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 $15,000 a year.The new machines are expected to increase quality,justifying a price increase and thereby increasing sales revenue by $5,000 a year.Select the true statement.
A) The company will be $11,000 better off over the five-year period if it replaces the old equipment.
B) The company will be $20,000 better off over the five-year period if it keeps the old equipment.
C) The company will be $12,000 better off over the five-year period if it replaces the old equipment.
D) The company will be $6,000 better off over the five-year period if it replaces the old equipment.

Question

Quizplus · Accepted Answer

The cost savings from reduced operating expenses ($15,000 - $9,000 = $6,000 per year) and increased sales revenue ($5,000 per year) total $11,000 per year. Over five years, this amounts to $55,000. The cost of the new machines is $50,000, so the net benefit is $55,000 - $50,000 = $5,000. Additionally, the old machines can be sold for $6,000, resulting in a total benefit of $11,000 over five years.

Mountain Gear Has Been Using the Same Machines to Make