An old machine that originally cost $9,500 thus far has accumulated depreciation of $1,900. The remaining useful life is four years, with no salvage value at the end of its useful life. A new machine is now available that costs $8,500, with a useful life of five years and no residual value. The old machine could be sold now for $4,200. The annual cash operating costs for the old machine are $5,000, but for the new machine they would be only $2,500. Gross revenue from the products would be $12,000 annually for either machine. The company should
A) keep the old machine to avoid a $4,200 loss on its disposal.
B) keep the old machine to avoid a $3,400 loss on its disposal.
C) replace the old machine.
D) keep the old machine to avoid an $8,500 decrease in cash.

Question

Quizplus · Accepted Answer

The relevant cost to consider in this decision is the annual cash operating cost, which is significantly lower for the new machine. Furthermore, the old machine has already accumulated a significant amount of depreciation and has a low sales value. The revenue generated by both machines is the same, but the cost savings associated with the new machine make it the better choice. Therefore, the company should replace the old machine with the new one.

An Old Machine That Originally Cost $9,500 Thus Far Has