Copy Center Is Considering Replacing Its Old Copying Machine, Which

question 68

Multiple Choice

Copy Center is considering replacing its old copying machine, which has a $3,200 book value, with a new one. Discounted cash flow analysis of the proposal to acquire the new machine shows an estimated net present value of $2,800. If the new machine is acquired, the old machine will have no resale value and will be given away. The loss on disposal of the old machine:

• A) Is an opportunity cost of purchasing the new machine.
• B) Exceeds the net present value of the new machine, indicating that the new machine should not be acquired.
• C) Has already been deducted in arriving at the $2,800 net present value of the new machine.
• D) Is a sunk cost and is not relevant to the decision at hand, except as it affects the timing of income tax payments.

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Definitions:

Equal Payments

Regular payments of the same amount over a specified period, commonly used in loan repayment schedules.

First Payment

The initial amount paid at the start of a financial agreement or loan.

Compounded Annually

A method of calculating interest where the interest rate is applied once per year, adding to the principal sum for the next period.

Equal Annual Payments

Regular payments of the same amount made over a specified period of time.