Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $602,100 and has $351,300 of accumulated depreciation to date, with a new machine that has a purchase price of $486,200. The old machine could be sold for $64,400. The annual variable production costs associated with the old machine are estimated to be $156,700 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,000 per year for eight years.

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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	$fill in the blank d791acf8707201b_1	$fill in the blank d791acf8707201b_2	$fill in the blank d791acf8707201b_3
Costs:
Purchase price	fill in the blank d791acf8707201b_4	fill in the blank d791acf8707201b_5	fill in the blank d791acf8707201b_6
Variable productions costs (8 years)	fill in the blank d791acf8707201b_7	fill in the blank d791acf8707201b_8	fill in the blank d791acf8707201b_9
Income (Loss)	$fill in the blank d791acf8707201b_10	$fill in the blank d791acf8707201b_11	$fill in the blank d791acf8707201b_12

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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.

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

Continue with the old machineReplace the old machineReplace the old machine

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Correct

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b. What is the sunk cost in this situation?

The sunk cost is $fill in the blank 674d78080f8006a_1.