Bert Company Is Considering Replacing a Machine That Is Presently

question 48

Multiple Choice

Bert Company is considering replacing a machine that is presently used in the production of its product.The following data are available: $$\begin{array} { l r r } & \text { Old Machine } & \begin{array} { r } \text { Replacement } \\\text { Machine }\end{array} \\\text { Original cost } & \$ 57,000 & \$ 35,000 \\\text { Useful life in years } & 17 & 5 \\\text { Current age in years } & 12 & 0 \\\text { Book value } & \$ 39,000 & - \\\text { Disposal value now } & \$ 8,000 & - \\\text { Disposal value in 5 years } & 0 & 0 \\\text { Annual cash operating costs } & \$ 7,000 & \$ 4,000\end{array}$$ The difference in cost between keeping the old machine and replacing the old machine, ignoring income taxes, is _____the old machine.

• A)$22,000 in favor of keeping
• B)$12,000 in favor of keeping
• C)$37,000 in favor of replacing
• D)$22,000 in favor of replacing

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Definitions:

Bondholders

Individuals or institutions that hold the debt securities issued by corporations or governments, entitling them to receive interest and the return of principal.

Present Value

The value today of a future monetary sum or sequence of cash inflows, calculated with a defined return rate.

Interest Rate

The rate of a loan designated as interest to the borrower, typically represented as an annual percentage of the loan's unpaid balance.

Present Discounted Value

The value of a future amount of money in today's terms, calculated by applying a discount rate to account for time and risk.