Mountain Gear Has Been Using the Same Machines to Make

Mountain Gear has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $100,000. The old machines presently have a book value of $60,000 and a market value of $6,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $50,000 and have operating expenses of $9,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $15,000 a year. The new machines are expected to increase quality, justifying a price increase, and thereby increasing sales revenue by $5,000 a year. Select the true statement.

A) The company will be $11,000 better off over the 5-year period if it replaces the old equipment.
B) The company will be $20,000 better off over the 5-year period if it keeps the old equipment.
C) The company will be $12,000 better off over the 5-year period if it replaces the old equipment.
D) The company will be $6,000 better off over the 5-year period if it replaces the old equipment.

Correct Answer:

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