Question

A company is considering buying a new machine and replacing the old one. The managers have collected the following information:

Current machine (old machine): ISK	ISK
The purchase price	50,000
Accumulated depreciation	40,000
Annual operating expenses	5,000
market	1,500
Impact value after 5 years	0
Repair of current machine (old machine):
Repair costs, improvements	12,000
Annual operating expenses after improvements	2,000
New engine:
The purchase price	56,000
Annual operating expenses	1,000
Impact value after 5 years	0

1. What is the sunk cost in the example?

2. Calculate profit or loss over a five-year period, assuming the company plans to purchase a new machine.

3. Calculate profit or loss over a five-year period, that the company is going to overhaul the existing machine.

4. What do you advise the company to do?

Answer 1

It is better to purchase a new machinery rather to overhaul existing one.