Machine Replacement Decision

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 has a purchase price of $545,000. The old machine could be sold for $231,000. The annual variable production costs associated with the old machine are estimated to be $61,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $19,000 per year for eight years.

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a.1 Prepare a differential analysis dated September 13, 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) September 13

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine	$fill in the blank 54bcf6fbbfb5fbd_1	$fill in the blank 54bcf6fbbfb5fbd_2	$fill in the blank 54bcf6fbbfb5fbd_3
Costs:
Purchase price	fill in the blank 54bcf6fbbfb5fbd_4	fill in the blank 54bcf6fbbfb5fbd_5	fill in the blank 54bcf6fbbfb5fbd_6
Variable production costs (8 years)	fill in the blank 54bcf6fbbfb5fbd_7	fill in the blank 54bcf6fbbfb5fbd_8	fill in the blank 54bcf6fbbfb5fbd_9
Income (Loss)	$fill in the blank 54bcf6fbbfb5fbd_10	$fill in the blank 54bcf6fbbfb5fbd_11	$fill in the blank 54bcf6fbbfb5fbd_12

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

Continue with the old machineReplace the old machine

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b. What is the sunk cost in this situation?