Question

A company is considering replacing an old piece of machinery, which cost $600,000 and has $350,000 of accumulated depreciation to date, with a new machine that has a purchase price of $545,000. The old machine could be sold for $231,000. The annual variable production costs associated with the old machine are estimated to be $61,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $19,000 per year for eight years.

Required:
A. Prepare a differential analysis dated September 13 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
B. Determine whether the company should continue with (Alternative 1) or replace (Alternative 2) the old machine.
C. What is the sunk cost in this situation?

Answer 1

The company should relace the old machine because it saved 22,000 cost

The book value of the old machine, 245,000 are sunk cost, are not relevant to determinate if the machien should be keeped or not.

Step-by-step explanation:

(A)

cost savings

current cost-61,000 for eight year

new cost -19,000 for eight year

cost saving 42,000 per year

42,000 x 8 = 336,000

545,000 cost of new machine

- 231,000 proceeds from old machine

= 314,000 cost of acquire the machine

336,000 cost savings - cost 314,000 = 22,000 net saving