Question

#8

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $598,800 and has $352,100 of accumulated depreciation to date, with a new machine that has a purchase price of $483,300. The old machine could be sold for $62,700. 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 $99,500 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

a.1 Prepare a differential analysis dated September 13, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine

	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	-62700	62700
Costs
Purchase price	0	483300	-483300
Variable productions costs (8 years)	155800*8 = 1246400	99500*8 = 796000	450400
Income (loss)	1246400	1216600	29800

2) Replace the machine

3) Sunk cost = old machine cost = $598800