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 costs $485,000. The old equipment could be sold for $63,000. 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 $100,500 per year for eight years.
a. Prepare a differential analysis dated October 3, 2012, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.
b. What is the sunk cost in this situation?