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Managerial Accounting

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Moderate

Relevant Cash Flows for Held Company

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Held Company bought Machine A on August 20, 2014 for \$5,000. At the time, the estimated residual value was \$350 and the estimated life was 13 years.

On August 20, 2015, the company learned that it could buy a different machine for \$6,000. The new machine would save the company an estimated \$400 per year compared to Machine A. The new machine would have no estimated residual value and an estimated life of 12 years. The company could get \$3,000 for Machine A on August 20, 2015.

​Ignoring taxes, which of the following calculations should the company use in deciding whether to purchase the new machine?

A

$\text{(PV of an annuity of \$400) + \$3,000 - \$6,000}$

B

$\text{(PV of an annuity of \$400) - \$6,000 + \$350}$

C

$\text{(PV of an annuity of \$400) + \$3,000 - \$6,000 - \$5,000}$

D

$\text{(PV of an annuity of \$400) + \$3,000 - \$5,000}$