Exercise 8-1 Cherry, Inc., currently has a machine that costs $10,000 per year t

Question

Exercise 8-1 Cherry, Inc., currently has a machine that costs $10,000 per year to operate. The machine can produce 50,000 units per year. Three years ago the company borrowed $200,000 to purchase the machine; it still owes $125,000 of that amount. Cherry could sell the machine for $70,000 and purchase a new, more efficient machine at a cost of $220,000. The new machine can produce 85,000 units per year; its annual operating costs would be $12,000. Indicate whether each piece of information in this scenario is relevant or irrelevant to the decision to purchase the new machine. Operating cost of old machine Production of old machine Purchase price of old machine Loan balance Market value of old machine Cost of new machine Production of new machine Operating cost of new machine

Explanation / Answer

Operating cost of old machine = $10,000 per year

Production of old machine =50,000 units per year

Purchase price of old machine = $200,000

Loan balance =$125, 000

Market value of old machine =$70, 000

Cost of new machine =$220, 000

Production of new machine=85,000 units per year

Operating cost of new machine =$12, 000 per year

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