Question

Park Ridge Company is considering the replacement of a machine that is presently used in production. The following data are available:

Old Machine New Machine
Original cost $200,000 $160,000
Useful life in years 10 5
Current age in years 5 0
Book value $100,000 -
Disposal value now $32,000 -
Disposal value in 5 years 0 0
Annual cash operating costs $20,000 $14,000

Adding all five years together, the total relevant costs to consider if the old machine is kept ____

Answer 1

Answer:

The Relevant Cost for Five Years     $52,000.00

Explanation:

‘Relevant costs’ can be defined as any cost relevant to a decision. A matter is relevant if there is a change in cash flow that is caused by the decision.

The Park Ridge Company's Relevant Old Machine Cost for Five Years is

Disposal value now                      $32,000.00  

Annual cash operating costs      $20,000.00

Relevant Cost for Five Years     $52,000.00

Old Machine

Original cost $200,000 is Sunk Cost

Useful life in years 10 5   - Will be used for the calculation of Depreciation, Therefore is an Irrelevant cost

Current age in years 5 0  - irrelevant year

Book value $100,000 -  are not cash flows and so are not relevant.

Disposal value now $32,000 -  

Disposal value in 5 years 0 is without a cost