Company has a piece of manufacturing equipment with a book value of $40,000 and

Question

Company has a piece of manufacturing equipment with a book value of $40,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $22,000. Granfield can purchase a new machine for $120,000 and receive $22,000 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,000 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

A. $22,000 decrease

B. $76,000 increase

C. $18,000 decrease

D. $52,000 increase

E. $22,000 increase

Explanation / Answer

Ignoring the time value of money

The total decrease in net income by replacing the current machine with the new machine = -Initial cash outlay + Saving in annual variable manufacturing costs * No of year

The total decrease in net income by replacing the current machine with the new machine = - ( 120000-22000) + 19000*4

The total decrease in net income by replacing the current machine with the new machine = -22000

Answer

A. $22,000 decrease

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