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19 September, 13:18

Rocko Inc. 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 $85,000 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

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  1. 19 September, 13:43
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    Yes, because income will increase by $23,000.

    Explanation:

    The computation is shown below:

    We know that

    New machine cost = $85,000

    Received amount = $38,000

    So, the extra cost would be

    = $85,000 - $38,000

    = $47,000

    And, the manufacturing cost for the 5 years would be

    = $14,000 * 5 years

    = $70,000

    Based on this above calculations the net gain would be

    = $70,000 - $47,000

    = $23,000 gain
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