Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $599,800 and has $351,100 of accumulated depreciation to date, with a new machine that has a purchase price of $486,600. The old machine could be sold for $61,200. The annual variable production costs associated with the old machine are estimated to be $155,700 per year for eight years. The annual variable production costs for the new machine are estimated to be $99,300 per year for eight years.

a. Prepare a differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 29
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine	$	$	$
Costs:
Purchase price
Variable productions costs (8 years)
Income (Loss)	$	$	$

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a. For the continue and replace alternatives subtract the costs from the revenues. Multiply the variable production cost for the eight year life. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2.

Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

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Incorrect

b. What is the sunk cost in this situation?

The sunk cost is $.