Sala Co Is Contemplating the Replacement of an Old Machine with with a New

question 73

Multiple Choice

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: $\begin{array}{lll}&\text {Old Machine }&\text {New Machine }\\\text { Price } & \$ 300,000 & \$ 600,000 \\\text { Accumulated Depreciation } & 90,000 & -0- \\\text { Remaining useful life } & 10 \text { years } & -0 \text { - } \\\text { Useful life } & -0 \text { - } & 10 \text { years } \\\text { Annual operating costs } & \$ 240,000 & \$ 180,600\end{array}$ If the old machine is replaced, it can be sold for $24,000. Which of the following amounts is relevant to the replacement decision?

• A) $210,000
• B) $300,000
• C) $59,400
• D) $90,000

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Definitions:

Static Theory of Capital Structure

A theory proposing that there is an optimal capital structure for a company, balancing the benefits and costs of debt versus equity financing to maximize value.

Financial Distress Costs

Expenses and losses incurred by a firm due to financial distress, including bankruptcy costs, agency costs, and the cost of lost opportunities.

Tax Benefit

A reduction in tax liability offered by the government for specific expenses, investments, or other financial decisions, leading to a decrease in the total taxes paid.

Debt-Equity Ratio

A metric for evaluating a firm's financial leverage, determined by dividing its total debts by the equity held by shareholders.