Question

Dinkins Inc. is considering disposing of a machine with a book value of $50,000 and an estimated remaining life of five years. The old machine can be sold for $15,000. A new machine with a purchase price of $150,000 is being considered as a replacement. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $70,000 to $45,000 if the new machine is purchased.

Determine the net differential increase or decrease in cost for the entire five years for the new equipment.

Answer 1

$10,000 increase

Step-by-step explanation:

The computation of the net differential increase or decrease in cost for the entire five years for the new equipment is as follows:

Particulars Keep the Replace the Effect on Cost

old mach. new mach.

Cost of 5 years 350,000 225000 -125000.00

Investment in new machine 0 150000.00 150000.00

Salvage value of old machine 0 -15000.00 -15000.00

Increase in cost 350,000 360000.00 10000.00