Xinhong Company is considering replacing one of its manufacturing machines. The

Question

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $40,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $50,000. Variable manufacturing costs are $33,800 per year for this machine. Information on two alternative replacement machines follows. Calculate the total change in net income if Alternative A is adopted. Calculate the total change in net income if Alternative B is adopted. Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase? Keep the manufacturing machine Alternative A Alternative B

Explanation / Answer

It would be better to go keep the existing machine because it involves the least cash outflow

Alternative 1 Alternative 2 Existing Machine cost to buy new Machine -120000 cost to buy new Machine -113000 cash outflow 0 trade of old machine 50000 trade of old machine 50000 variable manufacturing cost -33800 reduction in variable cost 10900 reduction in variable cost 23000 total change in net income -59100 total change in net income -40000 total change in net income -33800

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