Question

Granfield Company has a piece of manufacturing equipment with a book value of $35,500 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 $21,100. Granfield can purchase a new machine for $111,000 and receive $21,100 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $18,100 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:

A. $17,500 increase
B. $72,400 decrease
C. $14,400 decrease
D. $48,850 increase
E. $17,500 decrease

Answer 1

E.

Step-by-step explanation:

Book value of manufacturing equipment = $35,500

Remaining useful life = 4 years

Salvage value = $0

Current market value of equipment = $21,100

Cost of new machine = $111,000

Cash received from trading old machine = $21,100

Variable manufacturing costs of new machine reduce by $18,100 per year over the four-year = $18,100 * 4 = $72,400

Total increase/decrease in net income = Cost of new machine + income from trading old machine + Variable manufacturing costs reduce

= ($111,000) + $21,100 + $72,400

= ($17,500)

The total decrease in net income by replacing the current machine with the new machine is $17,500.