Question

4

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $597,400 and has $350,500 of accumulated depreciation to date, with a new machine that has a purchase price of $485,900. The old machine could be sold for $62,300. The annual variable production costs associated with the old machine are estimated to be $157,000 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. 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 "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)
April 29
	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.

b. What is the sunk cost in this situation?

The sunk cost is $.

Answer 1

Differential Analysis
Continue with Old Machine (Alternative. 1) or Replace Old Machine (Alternative. 2)
Sep-13
	Continue with Old Machine	Replace Old Machine	Differential Effect on Income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenue:
Proceeds from sale of old machine	-	62,300	62,300
Costs:
Purchase price	-	-4,85,900	-4,85,900
Variable manufacturing costs (8 years)	-12,56,000	-8,10,400	-4,45,600
Total costs	-12,56,000	-12,34,000	-22,000
Income (loss)	-12,56,000	-12,34,000	-22,000

The company should replace the old machine

b. The book value of the old machinery is sunk cost as it is irrelevent

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