Question

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,800 and has $351,900 of accumulated depreciation to date, with a new machine that has a purchase price of $485,900. The old machine could be sold for $61,200. The annual variable production costs associated with the old machine are estimated to be $156,600 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,300 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 Replace Old Machine Differential Effect on Income (Alternative 1) (Alternative 2) (Alternative 2) Revenues: Proceeds from sale of old machine Costs: Purchase price Variable productions costs (8 years) Income (Loss) a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. b. What is the sunk cost in this situation? The sunk cost is the $ .

Answer 1

A
	Continue with old machine	Replace old machine	Differential effect on income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues
Proceeds from sale of old machine	0	61200	61200
Costs
Purchase price	0	-485900	-485900
Variable production costs (8 years)	-1252800	-810400	442400
Income (loss)	-1252800	-1235100	17700
a2
Replace the old machine
b
Book value of the old machine is sunk cost
The sunk cost is the	248900	=600800-351900
Workings:
	Continue with old machine	Replace old machine
Variable production costs (8 years)	=156600*8	=101300*8