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.

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Definitions:

Competitive Price-searcher Markets

Markets where firms have some control over prices due to product differentiation, but must search for the best price to attract customers.

Price Searchers

Firms that have the ability to influence the price of the goods or services they sell by varying their output or product characteristics.

Gross Revenue

Total income received by a company from its business activities, before any expenses are deducted.

Per-unit Costs

The average cost for each unit of product produced, calculated by dividing the total cost of production by the number of units produced.