Question

eBook Show lle How Calculator Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $400,000 and has $175,000 of accumulated depreciation to date, with a new machine that has a purchase price of $550,000. The old machine could be sold for $250,000. The annual variable production costs associated with the old machine are estimated to be $72,500 per year for eight years. The annual variable production costs for the new machine are estimated to be $24,000 per year for eight years. a. 1 Prepare a differential analysis dated May 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter"0". If required, use a minus on to indicate a los Continue with DentulAna Machine (At. 1) or Replace M achine (Alt. 2) May 29 Continue Replace with Ok k i Differential (Alternative 1) (Alternative 2) (Alternative 2) Revue Procesome of old machines Costs: Purchase Variable production costs (years) Profit (Loss) 2.2 Determine whether to continue with (Artemative 1) or replace (Alternative 2) the old machine Continue with the old machine

Answer 1

a
	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	250000	250000
Costs:
Purchase price	0	-550000	-550000
Variable production costs (8 years)	-580000	-192000	388000
Profit (Loss)	-580000	-492000	88000
a2
The company should replace the old machine.
b
Sunk cost is book value of old machine
Sunk cost	225000	=400000-175000