Rocko Inc. has a machine with a book value of $50,000 and a five year remaining

Question

Rocko Inc. has a machine with a book value of $50,000 and a five year remaining life. A new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in the old machine. The new machine will reduce variable manufacturing costs by $14,000 per year over its five year life. Should the machine be replaced?

Yes, because income will increase by $14,000 per year.
Yes, because income will increase by $23,000.
No, because the company will be $23,000 worse off.
No, because the income will decrease by $14,000 per year.
Rocko will be not be better or worse off by replacing the machine.

Explanation / Answer

(85,000) + 38,000 + 14,000(5) = $23,000, so Yes, because income will increase by $23,000.

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