Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $602,000 and has $352,000 of accumulated depreciation to date, with a new machine that has a purchase price of $484,400. The old machine could be sold for $64,700. The annual variable production costs associated with the old machine are estimated to be $157,700 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,100 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 zero "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)	$	$	$

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

Machine Replacement Decision

b. What is the sunk cost in this situation?

The sunk cost is the $.