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

Madison Shannon

Business

5 June, 18:14

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

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Answers (2)

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Cecilia Wang · Answer 1

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

Julianne Evans · 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