A company purchased manufacturing equipment 5 years ago for $50,000. Accumulated depreciation is currently $45,000 and the remaining useful life is 3 years. The equipment incurs annual operating costs of $30,000. The company is considering replacing the equipment. The new equipment will cost $75,000, have a useful life of 3 years, and is more efficient and, therefore, only costs $10,000 to operate each year. The vendor is willing to accept the old equipment with a trade-in allowance of $10,000. The company should

Question

Business

Darryl Webb

19 August, 07:38

A company purchased manufacturing equipment 5 years ago for $50,000. Accumulated depreciation is currently $45,000 and the remaining useful life is 3 years. The equipment incurs annual operating costs of $30,000. The company is considering replacing the equipment. The new equipment will cost $75,000, have a useful life of 3 years, and is more efficient and, therefore, only costs $10,000 to operate each year. The vendor is willing to accept the old equipment with a trade-in allowance of $10,000. The company should

+1

Answers (2)

Know the Answer?

Freckles · Answer 1

keep the old equipment because the total net decrease in income will be $5,000 if they purchase the new equipment

Slade Castaneda · Answer 2

The company should keep their old equipment because if they buy the new equipment their cash flow will decrease by $5,000

Explanation:

If the company keeps the old equipment their costs will be:

$30,000 x 3 years = $90,000

total costs = $90,000

If the company buys the new equipment their costs will be:

equipment cost = $75,000 - $10,000 = $65,000

$10,000 x 3 years = $30,000

total costs = $95,000