Question

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $598,000 and has $349,500 of accumulated depreciation to date, with a new machine that has a purchase price of $483,400. The old machine could be sold for $64,200. The annual variable production costs associated with the old machine are estimated to be $155,800 per year for eight years. The annual variable production costs for the new machine are estimated to be $98,800 per year for eight years.

a.1 Prepare a differential analysis dated September 13, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
September 13
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine	$	$	$
Costs:
Purchase price
Variable productions costs (8 years)
Income (Loss)	$	$	$

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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 the $.

Answer 1

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
13-Sep
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine	0	64200	64200
Costs:
Purchase price	0	-483400	-483400
Variable productions costs (8 years)	-1246400	-790400	456000
Income (Loss)	-1246400	-1209600	36800
The sunk cost is the $248,500 book value ($598,000 cost less $349,500 accumulated depreciation) of the present equipment.