The manager of Big Mac Ltd is considering the purchase of equipment to make hamburgers that will reduce annual operating costs by $1500.The equipment will cost $6000 and will have a useful life of five years with no resale value.The new equipment will replace equipment purchased five years ago at a cost of $10 000,has a book value of $5000 and no resale value.What will be the net effect on profit for the next five years in total if the new equipment is purchased? (Ignore tax effects. )

Question

Quizplus · Accepted Answer

The cost of the new equipment is $6000, and the book value of the old equipment is $5000. Therefore, the net cost of purchasing the new equipment is $1000 ($6000 - $5000).

The annual savings from the new equipment is $1500. Therefore, over the course of five years, the total savings is $7500 ($1500 x 5).

However, since the net cost of purchasing the new equipment is $1000, the total net effect on profit for the next five years is a decrease of $3500 ($7500 - $1000).

Therefore, the best choice is C: $3500 decrease.

The Manager of Big Mac Ltd Is Considering the Purchase