Nighthawk Inc. is considering disposing of an old machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The three-year differential effect on profit from replacing the machine is a(n)
A)$8,750 increase
B)$31,250 decrease
C)$8,750 decrease
D)$2,925 decrease

Question

Quizplus · Accepted Answer

The correct answer is A because the three-year differential effect on profit from replacing the machine is a $8,750 increase. The annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. This will result in a $23,750 increase in profit each year. Over the three-year life of the new machine, this will result in a total increase in profit of $8,750.