1. A firm has to make a decision whether to replace a machine or keep it for 7 m
ID: 1186294 • Letter: 1
Question
1. A firm has to make a decision whether to replace a machine or keep it for 7 more years. It has identified 5 alternatives:
a. Spend $44K on repairs now and charge it as an one-time annual operating expense for this taxation year. Current operating expenses would remain the same.
b. Replace the machine with a new one costing $49K. Depreciation would be SL to zero over the 7 years of its life. Operating costs would be reduced by $6Kpa.
c. Spend $56K to buy specialized equipment which would reduce operating costs by $12Kpa. The machine would be depreciated 7 years using SOYD with no salvage value.
d. Replace the machine with a new one costing $49K. Depreciation would be SL to zero over the 7 years of its life. Operating costs would be reduced by $7Kpa.
e. Do nothing. Annual operating costs would increase $8Kpa.
Explanation / Answer
The best answer is C because it reduce operating cost by 12Kpa which will cover 84k in 7 year after pauin 56k it is still the most beneficial way....because it save 28k throughout the working of the firm in next 7 year......
in all other case no one is this much optimum, after this method D is the most optimum one since it would not save and spare a single$.
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