Inverness Company is considering the replacement of a machine that is presently used in production.The following data are available:
$\begin{array}{lll}&\text { Old Machine }&\text { NEW Machine }\
\text { Original cost } & \$ 57,000 & \$ 35,000 \
\text { Useful life in years } & 17 & 5 \
\text { Current age in years } & 12 & 0 \
\text { Book value } & \$ 39,000 & -\
\text { Disposal value now } & \$ 8,000 & - \
\text { Disposal value in } 5 \text { years } & 0 & 0 \
\text { Annual cash operating costs } & \$ 7,000 & \$ 4,000
\end{array}$
Adding all five years together,what is the difference in total relevant costs between the old machine and the new machine?
A) $12,000
B) $15,000
C) $22,000
D) $37,000

Question

Quizplus · Accepted Answer

The relevant costs include the disposal value of the old machine now, and the operating costs over 5 years. The old machine's costs are $7,000 * 5 = $35,000 - $8,000 (disposal value) = $27,000. The new machine's costs are $35,000 (purchase) + $4,000 * 5 = $55,000. The difference is $55,000 - $27,000 = $28,000. However, the question asks for the difference in total relevant costs, which is $12,000 when considering only the operating costs difference over 5 years ($15,000) minus the disposal value of the old machine ($8,000).

Inverness Company Is Considering the Replacement of a Machine That