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.

Question

Quizplus · Accepted Answer

The company will save $6,000 on the sale of the old machines and $6,000 per year on operating expenses. The increased sales revenue of $5,000 per year will result in an additional $25,000 over the five-year period. Thus, the total benefit of replacing the old machines is $6,000 + $6,000 x 5 + $25,000 = $51,000. The cost of the new machines is $50,000, so the company will be $1,000 better off over the five-year period if it replaces the old equipment.

Mountain Gear Has Been Using the Same Machines to Make