Question

Managers are examining a possible replacement of a machine decision and generate the following numbers: Book value of old machine 1,00,000, Current disposal value of old machine 50,000, Loss on disposal of old machine 300,000, Cost of new machine 600,000. In performing an analysis and in attempt to answer the question, 'should we replace the old machine', which of the following statements would be true?

1) The book value of the old machine is greater than the cost of the new machine.
2) The current disposal value of the old machine is greater than the cost of the new machine.
3) The loss on disposal of the old machine is greater than the cost of the new machine.
4) The cost of the new machine is greater than the book value of the old machine.

Answer 1

Statement 4) 'The cost of the new machine is greater than the book value of the old machine' is true. Managers should consider the cost of the new machine against not just the book value but also the present discounted value of future benefits and the sustainability aspects of the investment.

Step-by-step explanation:

When managers are examining a possible replacement of a machine they need to consider various financial factors including the book value of the old machine, its current disposal value, any loss on disposal, and the cost of the new machine.

With the information given: the book value of the old machine is 100,000, the current disposal value is 50,000, the loss on disposal would be 300,000 (which seems incorrect given the book value and disposal value), and the cost of the new machine is 600,000.

Looking at the numerical data, the cost of the new machine is indeed greater than the book value of the old machine. Hence, statement 4) 'The cost of the new machine is greater than the book value of the old machine' would be true. Statements 1), 2), and 3) are not correct based on the given values.

The managers should also consider other economic factors such as the present discounted value of future benefits from the new machine compared to the present costs, taking into account the broader implications of a sustainable economy and environmental considerations.