Question

iSooky has a spotter truck with a book value of $40,000 and a remaining useful life of five years. At the end of the five years the spotter truck will have a zero salvage value. The market value of the spotter truck is currently $32,000. iSooky can purchase a new spotter truck for $120,000 and receive $31,000 in return for trading in its old spotter truck. The new spotter truck will reduce variable manufacturing costs by $25,000 per year over the five-year life of the new spotter truck. The costs not relevant to the decision of whether or not to replace the spotter truck are:A) $31,000B) $25,000C) $125,000D) $120,000E) $40, 000

Answer 1

Answer:$40,000

Step-by-step explanation:

The $40,000 represents cost of the asset on purchase which is a sunk cost thereby no longer relevant to decision making because it has already been incurred and there is nothing that can be done to recover the cost.

$31 000 which is what is to be received by trading his spotter truck is still relevant because it can be earned, the $25,000 to be saved in cost is also relevant to determine cost reduction and same implies to the current sales price of $120,000 which is the fund to be provided in buying a new truck..