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Replacing a machine brings in $75,000 from the old asset, costs $182,000 for the new one and carries $6,000 a year of operating cost for six years. What is the result?
AA loss of $113,000
BA loss of $143,000
CA loss of $126,000
DA loss of $107,000
Answer & Solution
Correct answer: B. A loss of $143,000
1. Replacing generates revenue of $75,000 from selling the old machine.
2. The purchase price of the new machine is $182,000.
3. Operating costs are $6,000 a year for six years, which is $36,000.
4. Total costs are $182,000 plus $36,000, which is $218,000.
5. Income is $75,000 minus $218,000, which is a loss of $143,000.
6. The old machine's cost of $200,000 and its accumulated depreciation of $120,000 are sunk and play no part.
7. Omitting the six years of operating cost is what produces the smaller loss of $107,000.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.6 Keep or Replace a Fixed Asset_
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