Question

# #8 Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost...

#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 \$.

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) 1246400 796000 450400 Income (loss) 1246400 1216600 29800

2) Replace the machine

3) Sunk cost = old machine cost = \$598800

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