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 $280,000. The old machines presently have a book value of $128,000 and a market value of $20,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $180,000 and have operating expenses of $17,000 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 $38,000 a year. The new machines are expected to increase quality, justifying a price increase and thereby increasing sales revenue by $18,000 a year. Select the true statement. Multiple Choice O The company will be $35,000 better off over the 5-year period if it replaces the old equipment. The company will be $35,000 better off over the 5-year period if it replaces the old equipment. The company will be $55,000 better off over the 5-year period if it keeps the old equipment. The company will be $20,000 better off over the 5-year period if it replaces the old equipment.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 10P

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Transcribed Image Text: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 $280,000. The old machines presently have a book value of $128,000 and a market value of $20,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $180,000 and have operating expenses of $17,000 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 $38,000 a year. The new machines are expected to increase quality, justifying a price increase and thereby increasing sales revenue by $18,000 a year. Select the true statement. Multiple Choice O The company will be $35,000 better off over the 5-year period if it replaces the old equipment. The company will be $35,000 better off over the 5-year period if it replaces the old equipment. The company will be $55,000 better off over the 5-year period if it keeps the old equipment. The company will be $20,000 better off over the 5-year period if it replaces the old equipment.

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