Mountain Gear Has Been Using the Same Machines to Make

question 52

Multiple Choice

Mountain Gear has been using the same machines to make its name-brand clothing for the last five years.A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery.The old machines cost the company $100,000.The old machines presently have a book value of $60,000 and a market value of $6,000.They are expected to have a five-year remaining life and zero salvage value.The new machines would cost the company $50,000 and have operating expenses of $9,000 a year.The new machines are expected to have a five-year useful life and no salvage value.The operating expenses associated with the old machines are $15,000 a year.The new machines are expected to increase quality,justifying a price increase and thereby increasing sales revenue by $5,000 a year.Select the true statement.

• A) The company will be $11,000 better off over the five-year period if it replaces the old equipment.
• B) The company will be $20,000 better off over the five-year period if it keeps the old equipment.
• C) The company will be $12,000 better off over the five-year period if it replaces the old equipment.
• D) The company will be $6,000 better off over the five-year period if it replaces the old equipment.

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Definitions:

Going Concern

The assumption that a company will continue its operations in the foreseeable future and has no intention of liquidating its assets.

Cash Flows from Operating Activities

The section of the cash flow statement that shows the cash generated or used by a company's primary business activities.

Property Plant and Equipment

Long-term assets used in the operations of a business, not intended for sale, including land, buildings, and machinery.

Investing Activities

Financial transactions involving the purchase and sale of long-term assets and investments not included in cash equivalents.