Mountain Gear has been using the same machines to make its name brand clothing f

Question

Mountain Gear has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $380,000. The old machines presently have a book value of $138,000 and a market value of $30,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $280,000 and have operating expenses of $18,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $48,000 a year. The new machines are expected to increase quality, justifying a price increase, and thereby increasing sales revenue by $28,000 a year. Select the true statement.

Multiple Choice

A. The company will be $40,000 better off over the 5-year period if it replaces the old equipment.

B. The company will be $46,000 better off over the 5-year period if it replaces the old equipment.

C. The company will be $76,000 better off over the 5-year period if it keeps the old equipment.

D. The company will be $30,000 better off over the 5-year period if it replaces the old equipment.

Explanation / Answer

Solution: Option(A) is correct.

Explanation:

Old New 48000*5 = $240,000 18000*5 = $90,000 28000*5 = $140,000 Cost = $280,000 MV = $30,000 Total = $410,000 Total = $370,000 Difference = $40,000

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