Question

A company is considering replacing an old piece of machinery, which cost $598,900 and has $350,700 of accumulated depreciation to date, with a new machine that has a purchase price of $486,400. The old machine could be sold for $61,600. The annual variable production costs associated with the old machine are estimated to be $156,500 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 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 sign to indicate a loss.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 29
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine	$	$	$
Costs:
Purchase price
Variable productions costs (8 years)
Profit (Loss)	$	$	$

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

Replace the old machine

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b. What is the sunk cost in this situation?

The sunk cost is $.

Answer 1

a1
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 29
	Continue	Replace
	with Old	Old	Differential
	Machine	Machine	Effects
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues:
Proceeds from sale of old machine	0	61600	61600
Costs:
Purchase price	0	-486400	-486400
Variable productions costs (8 years)	-1252000	-801600	450400
Profit (Loss)	-1252000	-1226400	25600
a2
Replace (Alternative 2) the old machine
b
The sunk cost is book value of old machine
Sunk cost	248200	=598900-350700