Question

QS 23-14 Keep or replace LO P5 Rory Company has a machine with a book value of $79,000 and a remaining five-year useful life. A new machine is available at a cost of $118,500, and Rory can also receive $75,000 for trading in its old machine. The new machine will reduce variable manufacturing costs by $22,000 per year over its five-year useful life. Calculate the incremental income. (Any losses or outflows should be entered with a minus sign.)

Answer 1

Answer:

Incremental Income = $66,500

Explanation:

Incremental Income from Replacing Machine

Incremental Income from Replacing Machine   $110,000

(5 * $22,000)

Add: Salvage value of old machine                     $75,000

Total Income                                                          $185,000

Less: Acquisition Cost of New Machine               $118,500

Incremental Income                                              $66,500