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? A. Yes, because income will increase by $14,000 per year. B. Yes, because income will increase by $23,000 in total. C. No. because the company will be $23,000 worse off in total. D. No. because the income will decrease by $14,000 per year. E. Rocko will be not be better or worse off by replacing the machine.

Explanation / Answer

Answer B is Correct: Yes because income will increase by $23,000 in total .

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