Question

Granfield Company has a piece of manufacturing equipment with a book value of $40,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $22,000. Granfield can purchase a new machine for $120,000 and receive $22,000 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,000 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

Answer 1

The total decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is $22,000

Step-by-step explanation:

Taking note of "Ignoring the time value of money "

The total decrease in net income by replacing the current machine with the new machine = (-Initial cash outlay + Saving in annual variable) + manufacturing costs * Number of year

The total decrease in net income by replacing the current machine with the new machine = -$120000 + $22000 + $19,000 *4

= (-$120000 + $22000)+ $19,000 *4

= -$98,000 + $76,000

= -$22,000

Conclusion: The total decrease in net income by replacing the current machine with the new machine = $22,000