Wonderful Company Is Considering Replacing a Machine That Is Presently

question 96

Multiple Choice

Wonderful Company is considering replacing a machine that is presently used in the production of its product.The following data are available: $$\begin{array} { l r r } & \text { Old Machine } & \begin{array} { r } \text { Replacement } \\\text { Machine }\end{array} \\\text { Original cost } & \$ 333,000 & \$ 222,000 \\\text { Useful life in years } & 6 & 5 \\\text { Current age in years } & 1 & 0 \\\text { Book value } & \$ 198,000 & - \\\text { Disposal value now } & \$ 132,000 & - \\\text { Disposal value in 5 years } & \$ 10,000 & \$ 50,000 \\\text { Annual cash operating costs } & \$ 45,000 & \$ 34,000\end{array}$$ The _____ is a sunk cost.

• A)disposal value of the old machine
• B)original cost of the old machine
• C)annual cash operating costs of the old machine
• D)annual cash operating costs of the replacement machine

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Definitions:

Profit

The financial gain obtained when the revenue generated from business activities exceeds the expenses, costs, and taxes needed to sustain the activity.

Risk-Free Rate

The theoretical rate of return of an investment with zero risk, typically represented by the yield of long-term government bonds.

Stock Index

A measurement of the performance of a group of stocks, which represents a portion of the overall market.

Anticipated Dividend

Expected payment of dividends from a stock, often based on the company's earnings forecasts or past dividend payments.