Smith Industries Is Considering Replacing a Machine That Is Presently

question 99

Multiple Choice

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: $$\begin{array} { | l | r | r | } \hline & \text { Old Machine } & { \begin{array} { c } \text { Replacement } \\\text { Machine }\end{array} } \\\hline \text { Original cost } & \$ 45,000 & \$ 35,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 & 0 \\\hline \text { Book value } & \$ 25,000 & \\\hline \text { Current disposal value in cash } & \$ 8,000 & \\\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0 \\\hline \text { Annual cash operating costs } & \$ 7,000 &\$4,000 \\\hline\end{array}$$ Which of the information provided in the table is irrelevant to the replacement decision?

• A) the price of the new machine
• B) the original cost of the old machine
• C) the current disposal value of the old machine
• D) annual operating costs

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Definitions:

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded, with a typical downward slope indicating that demand increases as price decreases.

Producer's Surplus

The difference between what producers are willing to accept for a good or service and what they actually receive.

Marginal Cost Curve

A graph showing the change in total production cost that comes from making or producing one additional unit.

Competitive Firm

A company operating in a market where it has little to no market power, and thus sets its prices based on the market conditions.