Question

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $598,900 and has $352,200 of accumulated depreciation to date, with a new machine that has a purchase price of $486,500. The old machine could be sold for $65,000. The annual variable production costs associated with the old machine are estimated to be $156,800 per year for eight years. The annual variable production costs for the new machine are estimated to be $102,400 per year for eight years.

a.1 Prepare a differential analysis dated May 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 29
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine	$fill in the blank 96612cfe3fadf8c_1	$fill in the blank 96612cfe3fadf8c_2	$fill in the blank 96612cfe3fadf8c_3
Costs:
Purchase price	fill in the blank 96612cfe3fadf8c_4	fill in the blank 96612cfe3fadf8c_5	fill in the blank 96612cfe3fadf8c_6
Variable productions costs (8 years)	fill in the blank 96612cfe3fadf8c_7	fill in the blank 96612cfe3fadf8c_8	fill in the blank 96612cfe3fadf8c_9
Profit (Loss)	$fill in the blank 96612cfe3fadf8c_10	$fill in the blank 96612cfe3fadf8c_11	$fill in the blank 96612cfe3fadf8c_12

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a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

Replace the old machine

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b. What is the sunk cost in this situation?

The sunk cost is $fill in the blank f2d30c09502fff2_1.

Answer 1

a.1 Prepare a differential analysis dated May 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 29
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine		65000	65000
Costs:
Purchase price		486500	-486500
Variable productions costs (8 years)	156800*8 = 1254400	102400*8 = 819200	435200
Profit (Loss)	-1254400	-1240700	13700

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a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

Replace the old machine

b. What is the sunk cost in this situation?

The sunk cost is $246700