A company owns a 5-year old turret lathe that has a book value of $20,000. The p

Question

A company owns a 5-year old turret lathe that has a book value of $20,000. The present market value of the lathe is $16,000. A new turret lathe can be purchased for $45,000. Using an outsider’s point of view, what is the net first cost (cash flow) of keeping the old lathe? Justify your answer to get credit (there are not many calculations here). For example, mention what is sunk cost (if any), what is salvage value, etc....

(a) $29,000

(b) $45,000

(c) $20,000

(d) $16,000

Please show cash flow diagram and do not use excel functions.

Explanation / Answer

Using outsider's view point also known as the opportunity cost approach

Present Market value of the lathe = $16000

First cost of Keeping the old turret lathe = Present Market value of the lathe

First cost of Keeping the old turret lathe = $16000

The Answer is "D"

Salvage Value :- this is a resale value of asset after useful life.

Example :- Equipment Value is $100000 and 10 years is useful life and salvage value is $5000.

$5000 is resale value of Equipment after 10 years

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