Jarett Motors is trying to decide whether it should keep its existing car washing machine or purchase a new one that has technological advantages (which translate into cost savings) over the existing machine. Information on each machine follows: Old machine New machine Original cost $9,000 $20,000 Accumulated depreciation 5,000 0 Annual cash operating costs 9,000 4,000 Current salvage value of old machine 2,000 Salvage value in 10 years 500 1,000 Remaining life 10 yrs 10 yrs Refer to Jarett Motors. The $20,000 cost of the new machine represents a(n) Select one: a. future relevant cost b. future irrelevant cost c. opportunity cost d. sunk cost
Jarett Motors is trying to decide whether it should keep its existing car washing machine or purchase a new one that has technological advantages (which translate into cost savings) over the existing machine. Information on each machine follows: Old machine New machine Original cost $9,000 $20,000 Accumulated depreciation 5,000 0 Annual cash operating costs 9,000 4,000 Current salvage value of old machine 2,000 Salvage value in 10 years 500 1,000 Remaining life 10 yrs 10 yrs Refer to Jarett Motors. The $20,000 cost of the new machine represents a(n) Select one: a. future relevant cost b. future irrelevant cost c. opportunity cost d. sunk cost
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 9P
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Jarett Motors is trying to decide whether it should keep its existing car washing machine or purchase a new one that has technological advantages (which translate into cost savings) over the existing machine. Information on each machine follows:
| Old machine | New machine | |
|---|---|---|
| Original cost | $9,000 | $20,000 |
| 5,000 | 0 | |
| Annual cash operating costs | 9,000 | 4,000 |
| Current salvage value of old machine | 2,000 | |
| Salvage value in 10 years | 500 | 1,000 |
| Remaining life | 10 yrs | 10 yrs |
Refer to Jarett Motors. The $20,000 cost of the new machine represents a(n)
Select one:
a. future relevant cost
b. future irrelevant cost
c. opportunity cost
d. sunk cost
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