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2 May, 13:19

Granfield Company has a piece of manufacturing equipment with a book value of $35,500 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $21,100. Granfield can purchase a new machine for $111,000 and receive $21,100 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $18,100 per year over the four-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:

A. $17,500 increase

B. $72,400 decrease

C. $14,400 decrease

D. $48,850 increase

E. $17,500 decrease

+1
Answers (1)
  1. 2 May, 14:11
    0
    E.

    Explanation:

    Book value of manufacturing equipment = $35,500

    Remaining useful life = 4 years

    Salvage value = $0

    Current market value of equipment = $21,100

    Cost of new machine = $111,000

    Cash received from trading old machine = $21,100

    Variable manufacturing costs of new machine reduce by $18,100 per year over the four-year = $18,100 * 4 = $72,400

    Total increase/decrease in net income = Cost of new machine + income from trading old machine + Variable manufacturing costs reduce

    = ($111,000) + $21,100 + $72,400

    = ($17,500)

    The total decrease in net income by replacing the current machine with the new machine is $17,500.
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