Question

# Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost \$598,900...

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.

#### Homework Answers

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

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