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In: Accounting

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,700...

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,700 and has $347,800 of accumulated depreciation to date, with a new machine that has a purchase price of $483,600. The old machine could be sold for $62,100. The annual variable production costs associated with the old machine are estimated to be $157,600 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,200 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 zero "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. Replace the old machine Feedback Correct Machine Replacement Decision b. What is the sunk cost in this situation? The sunk cost is the $.

Solutions

Expert Solution

Note: The information on Present Value factor,Depreciation and Taxes were not available. Thus the question is solved without these informations.

Continuing Old Machine
Capital investment                           -  
Costs every year             (157,600)
Total Cash Inflow/(Outflow)         (1,260,800)
Purchasing New Machine
Capital Investment             (483,600)
Less: Sales Proceeds old Machine 62,100
Total Net investment             (421,500)
Costs every Year             (101,200)
Total Cash Inflow/(Outflow)         (1,231,100)
Incremental/Differential Cash Flow
Capital Investment             (421,500)
Differential Costs savings every year 56,400
No Of Years 8
Total Cash Inflow/ (Outflow) 29,700
Since the replacement will result in Cash Inflow of $ 29,700 . The Old machine should be replaced by the new one

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