Question

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

#3

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost \$597,000 and has \$349,300 of accumulated depreciation to date, with a new machine that has a purchase price of \$484,500. The old machine could be sold for \$62,600. The annual variable production costs associated with the old machine are estimated to be \$156,100 per year for eight years. The annual variable production costs for the new machine are estimated to be \$102,100 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) \$ \$ \$

b. What is the sunk cost in this situation?

The sunk cost is the \$.

Solution a:

 Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) Sep-13 Continue with Old Machine (Alt. 1) Replace Old Machine (Alt. 2) Differential effect on Income (Alt.2) Revenues: Proceeds from sale of old machine \$0.00 \$62,600.00 \$62,600.00 Costs: Purchase price \$0.00 -\$4,84,500.00 -\$4,84,500.00 Variable productions costs (8 years) -\$12,48,800.00 -\$8,16,800.00 \$4,32,000.00 Income (Loss) -\$12,48,800.00 -\$12,38,700.00 \$10,100.00

Solution b:

The sink Cost (Cost of old machine) is \$597,000.

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