Question

Rocko Inc. has a machine with a book value of $50,000 and a five-year remaining life. A new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in the old machine. The new machine will reduce variable manufacturing costs by $14,000 per year over its five-year life. Should the machine be replaced?Group of answer choicesYes, because income will increase by $14,000 per year.Yes, because income will increase by $23,000 in total.No, because the company will be $23,000 worse off in total.No, because the income will decrease by $14,000 per year.Rocko will be not be better or worse off by replacing the machine.

Answer 1

Answer:

Yes, because income will increase by $23,000

Explanation:

The computation is shown below:

= Saving of variable manufacturing costs for 5 years - extra cost required

where,

Saving of  variable manufacturing costs for 5 years is

= $14,000 × 5 years

= $70,000

And, the extra cost required is

= Cost of the new machine - received for trading in the old machine

= $85,000 - $38,000

= $47,000

So

= $70,000 - $47,000

= $23,000

This amount represents the net gain that concludes the machine should be replaced as it increase the income by  $23,000