Question

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $598,900 and has $347,000 of accumulated depreciation to date, with a new machine that has a purchase price of $486,100. The old machine could be sold for $64,800. 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 $99,700 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 "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)	$	$	$

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

b. What is the sunk cost in this situation?

The sunk cost is the $.

Answer 1

Differential Analysis:
			Continue with		Replace with		Differential
			Old machine		New machine		Income
Revenue:
Proceed from sale of old machine					64800		64800
Cost:
Purchase price					-486100		-486100
variable proportion cost			-1246400		-797600		448800
Income / (loss)			-1246400		-1,218,900		27500
The old machine shall be replaced with new machine.
The sunk cost is the price of old machine paid i.e. $ 598900