Question

A company is considering replacing an old piece of machinery, which cost $618,800 and has $344,300 of accumulated depreciation to date, with a new machine that has a purchase price of $539,850. The old machine could be sold for $234,800. The annual variable production costs associated with the old machine are estimated to be $61,850 per year for eight years. The annual variable production costs for the new machine are estimated to be $20,850 per year for eight years.

	Required:
a.	Prepare a differential analysis dated September 13 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
b.	Determine whether the company should continue with (Alternative 1) or replace (Alternative 2) the old machine.
c.	What is the sunk cost in this situation?

a. Prepare a differential analysis dated September 13 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Differential Analysis

Continue with (Alternative. 1) or Replace (Alternative. 2) Old Machine

September 13

1		Continue with Old Machine	Replace Old Machine	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
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Answer 1

a
Differential Analysis
Continue with (Alternative. 1) or Replace (Alternative. 2) Old Machine
September 13
	Continue with Old Machine	Replace Old Machine	Differential Effect on Income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues:	0	234800	234800
Proceeds from sale of old machine
Costs:
Purchase price	0	-539850	-539850
Variable production costs(8 years)	-494800	-166800	328000
Income (loss)	-494800	-471850	22950
b
Replace the old machine
c
Book value of the old machine