Question

Granfield Company has a piece of manufacturing equipment with a book value of $44,500 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $22,900. Granfield can purchase a new machine for $129,000 and receive $22,900 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,900 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

Answer 1

Answer:

$26,500 decrease

Explanation:

The total increase or decrease in net income by replacing the current machine with the new machine = Saving in variable manufacturing costs + Sale value of old machine - Purchase price of new machine

= ($19,900*4) + $22,900 - $129,000

= $79,600 + $22,900 - $129,000

= $26,500 decrease