A company is considering replacing an old piece of machinery, which cost $675,000 and has $380,000 of accumulated depreciation to date, with a new machine that has a purchase price of $825,000. The old machine could be sold for $300,000. The annual variable production costs associated with the old machine are estimated to be $85,000 per year for 8 years. The annual variable production costs for the new machine are estimated to be $25,000 per year for 8 years.
a. Prepare a differential analysis dated December 10 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.
b. What is the sunk cost in this situation?