Hondo Company Has a Machine with a Book Value of $50,000

question 108

Multiple Choice

Hondo Company has a machine with a book value of $50,000 and a five-year remaining life.A new machine is available at a cost of $108,000 and Rocko can also receive $38,000 for trading in the old machine.The new machine will reduce variable manufacturing costs by $14,000 per year over its five-year life.Should the machine be replaced?

• A) Yes, because income will increase by $14,000 per year.
• B) Yes, because income will increase by $52,000 immediately.
• C) No, because the company will be $108,000 worse off.
• D) No, because the income will decrease by $14,000 per year.
• E) Hondo will not be better or worse off by replacing the machine.