33) Daily Company has been using the same machines to make its name-brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $100,000. The old machines presently have a book value of $60,000 and a market value of $6,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $50,000 and have operating expenses of $9,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $15,000 a year. The new machines are expected to increase quality, justifying a price increase and thereby increasing sales revenue by $5,000 a year. Select the true statement. A. The company will be $12,000 better off over the five-year period if it replaces the old equipment. B. The company will be $11,000 better off over the five-year period if it replaces the old equipment. C. The company will be $36,000 better off over the five-year period if it replaces the old equipment. D. The company will be $20,000 better off over the five-year period if it keeps the old equipment.

Respuesta :

Answer:

Daily Company

B. The company will be $11,000 better off over the five-year period if it replaces the old equipment.

Explanation:

a) Data and Calculations:

Old Machines:

Cost of old machines = $100,000

Book value = $60,000

Market value = $6,000

Operating expenses per year = $15,000 (Total = $75,000)

Remaining useful life = 5 years

Salvage value  = $0

New Machines:

Cost of new machines = $50,000

Operating expenses per year = $9,000 (Total = $45,000)

Estimated useful life = 5 years

Salvage value = $0

Incremental Cash Flows:

                              Old Machines     New Machines

Cost of machines                                   ($50,000)

Operating expenses  ($75,000)              (45,000)

Sale of old machines                                   6,000

Sales revenue increase                            25,000

Net cash outflows       $75,000             $64,000

Overall benefit = $11,000 (reduced net cash outflows from $75,000 to $64,000)