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Company is evaluating the possibility of replacing an old machine with a new one
Company is evaluating the possibility of replacing an old machine with a new one. The old one cost $200,000, can be sold now for $80,000, can be sold in 5 years for $0, costs $40,000 a year to operate, and has a remaining life of 5 years. The new one would cost $400,000, could be sold in 5 years for $20,000, costs $10,000 a year to operate and has a remaining life of 5 years. Ignore taxes. As far as operating costs go, if the company buys the new machine and disposes of the old machine, corporate profit over the five-year life will be _____ than the profit that would have been generated had the existing machine been retained for five years.
Group of answer choices
$170,000 lower
$150,000 higher
$150,000 lower
$230,000 lower
Expert Solution
Operating cost of old machine = 40000 per year. So, for 5 years, 40000*5 = $200,000
Operating cost of new machine = 10000 per year. So, for 5 years, 10000*5 = $150,000
Since operating cost of new machine is lesser than that of the old machine, it will have a positive effect on corporate profit. Difference = 200000 - 50000 = $150,000
Therefore, the correct answer is the second option: $150,000 higher
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