The Mendez Company is trying to decide whether to replace a packing machine that it uses to pack salsa into individual serving size packages. The following information is provided:
Required:1) Compute the increase or decrease in total net income over the five-year period if the company chooses to buy the new machine.2) Compute the impact on the company's net income in the first year if the current machine is replaced. Do not take depreciation into account.
What will be an ideal response?
1) Increase or decrease in income:
| Cost savings: ($4,000 - $1,000) × 5 | $ 15,000 |
| Current salvage value | 4,000 |
| Cost of new machine | (16,000) |
| Increase in income | $ 3,000 |
| Cost savings: ($4,000 - $1,000) × 1 | $ 3,000 |
| Loss on exchange ($10,000 BV - $4,000 SV) | (6,000) |
| Net decrease in income | $ (3,000) |
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