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.

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 $330,000. The old machines presently have a book value of $133,000 and a market value of $25,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $230,000 and have operating expenses of $19,000 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 $43,000 a year. The new machines are expected to increase quality, justifying a price increase and thereby increasing sales revenue by $23,000 a year. Select the true statement.

Multiple Choice
The company will be $41,000 better off over the 5 year period if it replaces the old equipment.
The company will be $30,000 better off over the 5 year period if it replaces the old equipment. Correct
The company will be $25,000 better off over the 5 year period if it replaces the old equipment.
The company will be $66,000 better off over the 5 year period if it keeps the old equipment. 

Answer

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