Rocko Inc. has a machine with a book value of $50,000 and a five year remaining life. A new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in the old machine. The new machine will reduce variable manufacturing costs by $14,000 per year over its five year life. Should the machine be replaced?

Question

Quizplus · Accepted Answer

To calculate the net present value of replacing the old machine with the new one, we need to consider the following:

1. The cost of the new machine: $85,000
2. The trade-in value of the old machine: -$38,000
3. The present value of the cost savings from the new machine over its five-year life: $50,856 (calculated as $14,000 per year discounted at 10%)
4. The loss of salvage value in five years from the new machine: -$8,575 (calculated as the difference between the salvage values of the old and new machines discounted at 10%)

Therefore, the net present value of replacing the old machine with the new one is:

-$85,000 + $38,000 + $50,856 - $8,575 = -$4,719.

Since the net present value is negative, it is not economically feasible to replace the old machine with the new one, and the answer is choice D.

Rocko Inc Has a Machine with a Book Value of $50,000