A 1 Problem 4: Replacing old machine 3 4 C A company is considering replacing an old piece of machinery, which costs $600,000 and has $350,000 of accumulated depreciation to date, with a new machine that has a 5 purchase price of $545,000. The old machine could be sold for $231,000. The annual variable costs associated with the old machine are estimated to be $61,000 per year for eight years. 6 7 8 9 The annual variable production costs for the new machine are estimated to be $19,000 per year for eight years. 10 11 Old machine: 12 Historical Costs $600,000 13 Accumulated depreciation $350,000 14 Annual variable production costs $61,000 15 Remaining useful life 8 years 16 Could be sold for $231,000 17 New machine: 18 Purchase price $545,000 19 Annual variable production costs 20 Useful life 21 22 Required: $19.000 8 years 23 A. Prepare a differential analysis dated September 13 to determine whether 24 to continue with (Alternative 1) or replace (Alternative 2) the old machine.. 25 B. What is the sunk cost in this situation? Should they replace the machine? Explain. 26 27 Solution 28 A 29 30 31 32 33 Differential Analysis D E Continue with (Alt. 1) or Replace (Alt. 2) Old Machine September 13 Continue with Old Machine Replace Old Machine Differential effect of Alt. 2 on income (Alternative 1) (Alternative 2) (Alt. 2-Alt. 1) $ $ $ 34 Revenues: 35 Proceeds from sale of old machine 36 Costs: 37 Purchase price 38 Variable production costs (8 years) 39 Income (loss) 40 41 B. Explanation: 42 43 44 45 46 Problem1 Problem2 Problem3 Problem4 Problem5