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

Question

Machine Replacement Decision

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 "0". Use a minus sign to indicate a 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 $.

Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) October 3 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) $ $ $

Explanation / Answer

Continue with Old Machine Replace Old Machine Differential Effect on Income (Alternative 1) (Alternative 2) Revenues: Proceeds from sale of old machine 64100 64100 Costs: Purchase price -483800 -483800 Variable productions costs (8 years) -1249600 -794400 455200 Income (Loss) -1249600 -1214100 35500 The company should replace the old machine. b The sunk cost is the $250,200 book value ($600,200 cost less $350,000 accumulated depreciation)

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