Maxwell Manufacturing Is Contemplating the Purchase of a New Machine

question 7

Multiple Choice

Maxwell Manufacturing is contemplating the purchase of a new machine to replace a machine that has been in use for seven years. The old machine has a net book value (NBV) of $50,000 and still has five years of useful life remaining. The old machine has a current market value of $5,000, but is expected to have no market value after five years. The variable operating costs and depreciation expenses (straight-line basis) are $135,000 per year. The new machine will cost $90,000, has an estimated useful life of five years with zero disposal value after five years, and an annual operating expense of $118,000 (including straight-line depreciation) . Considering the five years in total and ignoring the time value of money and income taxes, what is the difference in total relevant costs for the two decision alternatives (keep vs. replace) ?

• A) $0.
• B) $25,000.
• C) $35,000.
• D) $40,000.
• E) $50,000.

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Definitions:

Supplier Power

The influence that suppliers have over the price and availability of their products or services, which can impact the market dynamics.

Small Town

A small town is a community with a small population and relatively few buildings, often characterized by a close-knit society and slower pace of life compared to urban areas.

Operational Effectiveness

The ability of an organization to execute its operations more efficiently than its competitors, often by optimizing internal processes.

Cost Leader

A strategy or company that aims to achieve a competitive advantage by reducing operational costs and offering lower prices than competitors.