Question

EX 24-9 Machine replacement decision A company is considering replacing an old piece of machinery, which cost $600,000 and has $350,000 of accumulated depreciation to date, with a new machine that costs $485,000. The old equipment could be sold for $63,000. The annual variable production costs as- sociated with the old machine are estimated to be $157,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $100,500 per year for eight years. a. Prepare a differential analysis dated October 3, 2012, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. b. What is the sunk cost in this situation?

Need help with the work and how to find solutions , where ti put accurate answers

	Continue w/old machine	Replace old machine	Differential Effect
Revenues:
Proceeds from sale
Total
Costs:
Purchase price
Variable production cost
Income (Loss)
	Continue w/old machine	Replace old machine	Differential Effect
Revenues:
Proceeds from sale
Total
Costs:
Purchase price
Variable production cost
Income (Loss)

Answer 1

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Part a
	Continue w/old machine	Replace old machine	Differential Effect of Replacing
Revenues:
Proceeds from sale		$                                    63,000	$                                                    63,000
Total costs:
Purchase price		$                               (485,000)	$                                                (485,000)
Variable production cost (8 Years)	$                                    (1,256,000)	$                               (804,000)	$                                                  452,000
Income (Loss)	$                                    (1,256,000)	$                            (1,226,000)	$                                                    30,000
Since Replacing the machin is having lower loss by 30,000, it should be replaced
Part b
Old machine's purchase cost of Rs $600,000 is sunk.