Nighthawk Inc. is considering disposing of a machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered as a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The net differential increase or decrease in cost for the entire three years for the new equipment is

Question

Alfred Pruitt

Business

3 April, 17:09

Nighthawk Inc. is considering disposing of a machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered as a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The net differential increase or decrease in cost for the entire three years for the new equipment is

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Giuliana Giles · Answer 1

The net differential decrease in cost for the entire three years is $8750

Explanation:

The benefits from purchasing the new machine includes the receipt of $6,250 salvage value as well as the reduction in variable manufacturing costs by $23,750 for 3 years ($43,750-$20,000).

Also, additional cost needed to acquire the new machine is the purchase price of $68,750, hence the net benefits overall is shown below:

Salvage value $6,250

cost savings ($23,750*3) $7,1250

Total benefits $77,500

costs ($68,750)

net benefits $8,750