Hip Duds Company is considering the purchase of new machines on January 1, 2015. Trail Power 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 $200,000. The old machines presently have a book value of $120,000 and a market value of $13,000. They are expected to have a five-year remaining life and $1,000 salvage value. The new machines would cost the company $120,000 and have operating expenses of $8,000 a year. The new machines are expected to have a 5-year useful life and $20,000 salvage value. The operating expenses associated with the old machines are $30,000 a year.
A) Keeping the old equipment will add $40,000 to total profitability over the next five years.
B) Replacing the equipment will add $12,000 to total profitability over the next five years.
C) Keeping the old equipment will add $22,000 to total profitability over the next five years.
D) Replacing the equipment will add $22,000 to total profitability over the next five years.