Question

A company is considering replacing an old piece of machinery, which cost $602,500 and has $347,800 of accumulated depreciation to date, with a new machine that has a purchase price of $486,900. The old machine could be sold for $63,500. The annual variable production costs associated with the old machine are estimated to be $157,400 per year for eight years. The annual variable production costs for the new machine are estimated to be $99,900 per year for eight years. a. Prepare a differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "O". 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) April 29 Continue Replace Differential with Old Old Effect Machine Machine 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) Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. b. What is the sunk cost in this situation?

Answer 1

	Alternate 1	Alternate 2	Differantial Effect On Income
	Continue with old machine	Replace Old Machine
Revenues:
Proceeds From Sale Of Old Machine	0	63500	-63500
Costs:
Purchase Price		486900	-486900
Varible production Cost(8 yr)	1259200	799200	460000
Income/(Loss)	-1259200	-1222600	-36600
Alternative 2 is feasible due to lower cost
Sunk Cost :Purcahse price of old machine	602500