Question

Barans Manufacturing is developing the incremental cash flows associated with the proposed replacement of an existing stamping machine with a new, technologically advanced one. Given the following costs related to the proposed project, explain whether each would be treated as a sunk cost or an opportunity cost in developing the incremental cash flows associated with the proposed replacement decision.
a. Barans could use the same dies and other tools (with a book value of $40,000) on the new stamping machine that it used on the old one.
b. Barans could link the new machine to its existing computer system to control its operations. The old stamping machine did not have a computer control system. The firm’s excess computer capacity could be leased to another firm for an annual fee of $17,000.
c. Barans needs to obtain additional floor space to accommodate the new, larger stamping machine. The space required is currently being leased to another company for $10,000 per year.
d. Barans can use a small storage facility, built by Barans at a cost of $120,000 three years earlier, to store the increased output of the new stamping machine. Because of its unique configuration and location, it is currently of no use to either Barans or any other firm.
e. Barans can retain an existing overhead crane, which it had planned to sell for its $180,000 market value. Although the crane was not needed with the old stamping machine, it can be used to position raw materials on the new stamping machine.


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  • CreatedMarch 26, 2015
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