Janko Wellspring Inc.has a pump with a book value of $24,000 and a four-year remaining life.A new,more efficient pump,is available at a cost of $45,000.Janko can also receive $8,000 for trading in the old pump.The new pump will reduce variable costs by $10,000 per year over its four-year life.Should the pump be replaced?
A)Yes,because income will increase by $3,000 in total.
B)Yes,because income will increase by $3,000 per year.
C)No,because the company will be $3,000 worse off in total.
D)No,because income will decrease by $10,000 per year.
E)No,Janko will record a loss of $16,000 if they replace the pump.

Question

Quizplus · Accepted Answer

The total cost of the new pump is $45,000, but with the trade-in, the net cost is $37,000 ($45,000 - $8,000). The savings from the new pump are $10,000 per year for four years, totaling $40,000. Subtracting the net cost of the new pump ($37,000) from the total savings ($40,000) results in a net benefit of $3,000 over the four years.