Question

Janko Wellspring Inc. has a pump with a book value of $24,000 and a four-year remaining life. A new, more efficient pump, is available at a cost of $45,000. Janko can also receive $8,000 for trading in the old pump. The new pump will reduce variable costs by $10,000 per year over its four-year life. Should the pump be replaced?A. No, because the company will be $3,000 worse off in total.B. Yes, because income will increase by $3,000 per year.C. No, because income will decrease by $10,000 per year.D. No, Janko will record a loss of $16,000 if they replace the pump.E. Yes, because income will increase by $3,000 in total.

Answer 1

Answer: E. Yes, because income will increase by $3,000 in total.

Explanation:

If the Incremental benefit is positive then the pump should be replaced.

Incremental Benefit = Cost saving + cash received for trading in old pump - Cost of new pump

= (10,000 * 4) + 8,000 - 45,000

= $3,000

Over the four years, the income from the decision to replace the old pump will yield an income of $3,000.