Granfield Company has a piece of manufacturing equipment with a book value of $4
ID: 2575392 • Letter: G
Question
Granfield Company has a piece of manufacturing equipment with a book value of $44,000 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 $22,800. Granfield can purchase a new machine for $128,000 and receive $22,800 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,800 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:
Explanation / Answer
Net cost of new machine = 128000 - 22800 = 105200
Savings in variable cost per year = 19800
Depreciation of old machine = 44000/4 = 11000
Depreciation on new machine = 105200/4 = 26300
Increase in depreciation per year = 26300-11000 = 15300
Net increase in net income = 19800-15300 = 4500
Total increase in net income = 4500*4 = 18000
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