Question

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $597,700 and has $347,700 of accumulated depreciation to date, with a new machine that has a purchase price of $486,500. The old machine could be sold for $64,300. The annual variable production costs associated with the old machine are estimated to be $155,500 per year for eight years. The annual variable production costs for the new machine are estimated to be $100,200 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	$0	$64300	$64300
Costs:
Purchase price	0	486500	486500
Variable productions costs (8 years)
Income (Loss)	$	$	$

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

Replace the old machine

b. What is the sunk cost in this situation?

The sunk cost is the $.

Answer 1

A
	Continue with old machine	Replace old machine	Differential effect on income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues
Proceeds from sale of old machine	0	64300	64300
Costs
Purchase price	0	-486500	-486500
Variable production costs (8 years)	-1244000	-801600	442400
Income (loss)	-1244000	-1223800	20200
B
Replace the old machine
C
Sunk cost	250000	=597700-347700
Workings:
	(Alternative 1)	(Alternative 2)
Variable production costs (8 years)	=155500*8	=100200*8