Question

Rory Company has a machine with a book value of $75,000 and a remaining five-year useful life. A new machine is available at a cost of $112,500, and Rory can also receive $60,000 for trading in its old machine. The new machine will reduce variable manufacturing costs by $13,000 per year over its five-year useful life. should the machine repalce?

Answer 1

The machine should be replaced as it would bring about $12,500 incremental cash flow/benefits

Step-by-step explanation:

In deciding whether or not the machine should be replaced ,we can examine the issue by computing the incremental cash flows that would accrue to the company from replacing the asset rather than sticking to the old one.

The benefits from replacement:

Part exchange cash $60,000

reduction in variable manufacturing costs($13000*5) $65,000

total benefits $125,000

less cost of the new machine ($112,500)

incremental cash flow $12,500