Question

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $45,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $52,000. Variable manufacturing costs are $36,000 per year for this machine. Information on two alternative replacement machines follows.

Answer 1

Step-by-step explanation:

To Keep Old Machine initial Cost $52,000 ( as Opportunity cost , if machine not sold

Alternative A $115,000

Alternative B $125,000

I

Variable Cost for Five Years $180,000 [36000*5]

$95,000 [19000*5]

$75,000[15000*5]

Total Cost under $232,000

Alternative A $210,000

Alternative B $200,000

1. Xinhong should replace the old machine as it has the highest cost among each alternative

2. Machine under alternative B should be purchased as it has the lowest cost in comparison between alternative A and B