Machine Replacement Decislon A company is considering replacing an old piece of

Question

Machine Replacement Decislon A company is considering replacing an old piece of machinery, which cost $600,200 and has $350,000 of accumulated depreciation to date, with a new machine that costs $483,800. The old machine could be sold for $64,100. The annual variable production costs associated with the old machine are estimated to be $156,200 per year for eight years. The annual variable production costs for the new machine are estimated to be $99,300 per year for eight years a. Prepare a differential analysis dated October 3, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter zero "o". Use a minus sign to indicate a loss. Differential Analysis Continue with Old Machine (At. 1) or Replace Old Machine (Ait. 2) October3 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (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 Machine Replacement Decision b. What is the sunk cost in this situation? The sunk cost is the

Explanation / Answer

1)

)Replace the old machine as it will result in saving of 35500

b)Sunk cost is the book value of old machine :600200-350000=250200

continue old machine replace old machine Differential effect on Income Revenue proceed from sale of old machine 0 64100 64100 cost purchase cost -483800 -483800 variable production cost 156200*8=-1249600 99300*8=-794400 455200 Income/(loss) -1249600 -1214100 35500

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