Gwynn Company is considering the replacement of a machine that is presently used
ID: 2353713 • Letter: G
Question
Gwynn Company is considering the replacement of a machine that is presently used to produce its single product. The following data are available:Old Replacement
Equipment Equipment
Original cost $210,000 $40,000
Useful life in years 12 7
Current age in years 5 0
Book value $65,000
Disposal value now $30,000
Disposal value in 7 years 0 0
Annual cash operating costs $10,000 $9,000
Required:
Ignoring income taxes, prepare a cost comparison of all relevant items for the next seven years together. Indicate the best alternative for Gwynn Company.
Explanation / Answer
keep
replace
difference
Cash operating
70 000
63 000
7000
Disposal value of old machine
-
30000
30 000
New machine
-
40 000
40 000
Total relevant cost
70 000
73 000
3000
The cumulative effect over seven years is 3000 in favor of keeping the old mahcine
keep
replace
difference
Cash operating
70 000
63 000
7000
Disposal value of old machine
-
30000
30 000
New machine
-
40 000
40 000
Total relevant cost
70 000
73 000
3000
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