iSooky has a spotter truck with a book value of $40,000 and a remaining useful life of five years.At the end of the five years the spotter truck will have a zero salvage value.The market value of the spotter truck is currently $32,000.iSooky can purchase a new spotter truck for $120,000 and receive $31,000 in return for trading in its old spotter truck.The new spotter truck will reduce variable manufacturing costs by $25,000 per year over the five-year life of the new spotter truck.The total increase or decrease in income by replacing the current spotter truck with the new truck (ignoring the time value of money)is:
A)$31,000 decrease
B)$31,000 increase
C)$36,000 decrease
D)$120,000 decrease
E)$36,000 increase

Question

Quizplus · Accepted Answer

The current spotter truck has a book value of $40,000 but a market value of $32,000, indicating that it has depreciated more than its book value. It also has no salvage value at the end of its useful life, so it will not provide any additional income or cost savings beyond its current use.

On the other hand, the new spotter truck has a cost of $120,000 but with a trade-in value of $31,000, its net cost is $89,000. Over its five-year useful life, it will reduce variable manufacturing costs by $25,000 per year, for a total savings of $125,000.

Therefore, the total increase in income by replacing the current spotter truck with the new truck would be:

Total increase = Savings from new truck - Loss from current truck + Trade-in value
Total increase = ($125,000) - ($40,000) + ($31,000)
Total increase = $116,000

Therefore, the answer is E) $36,000 increase.

ISooky Has a Spotter Truck with a Book Value of $40,000