You are considering two options for manufacturing a typical product: You continue to use an old machine now in use which was bought 8 years ago at $12,000. It has been fully depreciated but can be sold for $7,00. If kept, it could be used for 3 more years (remaining useful life), at the end of which time it would have no salvage value. The annual operating and maintenance costs amount to $10,000 for the old machine. You purchase a brand new machine at an invoice price of $15,000 to replace the present equipment. Because of the nature of the product manufactured, it also has an expected economic life of 3 years, and will have a salvage value of $3,400 at the end of that time. With the new machine, the expected operating and maintenance costs amount to $3,000 for the first year and $4,000 in each of the next two years. What is the opportunity cost of not replacing the old machine now? $700 $1,300 $2,000 $10,000
You are considering two options for manufacturing a typical product:
You continue to use an old machine now in use which was bought 8 years ago at $12,000. It has been fully depreciated but can be sold for $7,00. If kept, it could be used for 3 more years (remaining useful life), at the end of which time it would have no salvage value. The annual operating and maintenance costs amount to $10,000 for the old machine.
You purchase a brand new machine at an invoice price of $15,000 to replace the present equipment. Because of the nature of the product manufactured, it also has an expected economic life of 3 years, and will have a salvage value of $3,400 at the end of that time. With the new machine, the expected operating and maintenance costs amount to $3,000 for the first year and $4,000 in each of the next two years.
What is the opportunity cost of not replacing the old machine now?
- $700
- $1,300
- $2,000
- $10,000
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