Multiple Choice Question 149 Waterway Industries is contemplating the replacemen
ID: 2544567 • Letter: M
Question
Multiple Choice Question 149
Waterway Industries is contemplating the replacement of an old machine with a new one. The following information has been gathered:
Old Machine New Machine
Price $304000 $604000
Accumulated Depreciation 91200 -0-
Remaining useful life 10 years -0-
Useful life -0- 10 years
Annual operating costs $243200 $183200
If the old machine is replaced, it can be sold for $24000. The company uses straight-line depreciation with a zero salvage value for all of its assets.
The net advantage (disadvantage) of replacing the old machine is
$(6040)
$(60400)
$20000
$24320
Concord Corporation has several outdated computers that cost a total of $15400 and could be sold as scrap for $3200. They could be updated for an additional $1700 and sold. If Concord updates the computers and sells them, net income will increase by $9000.
What amount would be considered sunk costs?
$9000
$17100
$15400
$1700
Explanation / Answer
Solution 1:
Cost of new machine = $604,000
Sale value of old machine = $24,000
Net cost of investment = $604,000 - $24,000 = $580,000
Saving in annual operating cost = $243,200 - $183,200 = $60,000
Useful life of assets = 10 years
Therefore total saving in operating cost during life of new machine = $60,000 *10 = $600,000
Net advantage of replacing the old machine = $600,000 - $580,000 = $20,000
Hence 3rd option is the right choice.
Solution 2:
In the given scenario, cost of outdated computers amounting $15,400 will be considered as sunk cost as it is already incurred in past and irrelevant for decesion making.
Hence 3rd option is the right choice.
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