Question

Riener Hospital has an x-ray machine with a book value of $60,000 and a remaining useful life of three years. At the end of the three years the equipment will have a zero salvage value. The market value of the equipment is currently $32,000. Riener can purchase a new machine for $145,000 and receive $28,000 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $27,000 per year over the three-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

Answer 1

Answer:

The total increase in costs is $36000

Explanation:

The total decrease or increase in net income by replacing the current old machine with the new machine can be computed by using incremental benefit analysis.

The analysis is such that the increase in costs and revenue due to purchasing are compared side by side in order to ascertain whether or not the benefits outweigh the costs.

The benefits of purchasing the new machine includes the trade-in value of $28,000 plus reduction in variable manufacturing costs by $27000

However,the cost of the new machine of $145,000 must also be considered.

Incremental benefits/(costs)=$28,000+($27,000*3)-$145,000=$-36000