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 $390,000. The old machines presently have a book value of $139,000 and a market value of $31,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $290,000 and have operating expenses of $19,000 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 $49,000 a year. The new machines are expected to increase quality, justifying a price increase, and thereby
increasing sales revenue by $29,000 a year. Select the true statement.
A. The company will be $78,000 better off over the 5-year period if it keeps the old equipment.
B. The company will be $47,000 better off over the 5-year period if it replaces the old equipment.
C. The company will be $36,000 better off over the 5-year period if it replaces the old equipment.
D. The company will be $31,000 better off over the 5-year period if it replaces the old equipment.
Answer: C
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