Question

The capital budgeting committee of the Caldwell Pipe Corporation is evaluating the possibility of replacing its old pipe-bending machine with a more advanced model. Information on the existing machine and the new model follows: Existing machine New machine Original cost $200,000 $400,000 Market value now 80,000 Market value in year 5 0 20,000 Annual cash operating costs 40,000 10,000 Remaining life 5 yrs 5 yrs Refer to Caldwell Pipe Corporation. If the company buys the new machine and disposes of the existing machine, corporate profit over the five-year life of the new machine will be ________ than the profit that would have been generated had the existing machine been retained for five years. Select one: a. $230,000 lower b. $150,000 lower c. $150,000 higher d. $170,000 lower

Answer 1

c. $150,000 higher

Step-by-step explanation:

Operating cost of old machine = $40,000 per year

For 5 years, $40,000*5 years = $200,000

Operating cost of new machine = $10,000 per year

For 5 years, $10,000*5 = $50,000

Operating cost of new machine ($50,000) < ($200,000) Operating cost of the old machine. Thus, this will have a positive effect of $150,000 ($200,000-$50,000) on the corporate profit.