Question

Rory Company has a machine with a book value of \(75,000 and a remaining five-year useful life. A new machine is available at a cost of \)112,500, and Rory can also receive \(60,000 for trading in its old machine. The new machine will reduce variable manufacturing costs by \)13,000 per year over its five-year useful life. Should the machine be replaced?

Short answer

The incremental income of the company is $12,500

Step-by-step solution

Definition of incremental income

The incremental income is the income that is earned by making extra sales.

Calculation of incremental income

Saving on variable manufacturing costs ($1,3000*5)	$65,000
Trading in the old machine	$60,000
Total Income	$125,000
Less: Cost of the new machine	-$112,500
Incremental income	$12,500

In this case, the old machine should be replaced by the company.