Songo currently uses a manufacturing machine that costs $6,500 per year to opera

Question

Songo currently uses a manufacturing machine that costs $6,500 per year to operate. The machine originally cost $12,000 and had a 10 year useful life. The machine is currently 7 years old, after the remaining 3 years, the machine will be disposed of for $5,000. They have the option of purchasing a new machine for $15,000, which also has a useful life of 10 years, but it only costs $2,000 to operate per year. If Songo were to scrap the old machine today, they would earn $7,000.

A)What is the net result, over the remaining 3 years, of keeping the old machine? (round to nearest dollar, no dollar sign, use - to indicate a negative result)

B)What should Songo do?

keep the machine

replace the machine

keep the machine

replace the machine

Explanation / Answer

A). The net result of keeping the machine for remaining 3 years would be the cost of operating for the 3 years substracted from the scrap value after 3 years, = 5000 - 6500*3 = -14500

B). If Songo replace the old machine, they would earn from its current scrap value and would have to pay for the new machine and its operating cost for 3 years, = 7000 - 15000 - 2000*3 = -14000

So, Songo will save $500 by replacing the old machine right now

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