Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $$600,600$ and has $$352,100$ of accumulated depreciation to date, with a new machine that has a purchase price of $$486,200.$ The old machine could be sold for $$63,700.$ The annual variable production costs associated with the old machine are estimated to be $$158,200$ per year for $8$ years. The annual variable production costs for the new machine are estimated to be $$101,300$ per year for $8$ years.

a$.1$ Prepare a differential analysis dated December $10$ to determine whether to continue with $($Alternative $1)$ or replace $($Alternative $2)$ the old machine. If an amount is zero, enter $"0".$ If required, use a minus sign to indicate a loss.

Differential Analysis

Continue with $($Alt$.1)$ or Replace $($Alt$.2)$ Old Machine

December $10$

Line Item Description

Revenues:

Proceeds from sale of old machine

Costs:

Purchase price

Variable productions costs $(8$ years$)$

Profit $($loss$)$

Continue with

Old Machine

$($Alternative $1)$

Replace Old Machine

$($Alternative $2)$

$$

$$

$q,$

$$

$$

$q,$

$q,$

Differential Effects

$($Alternative $2)$

$$

$$

$

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

$$

b$.$ What is the sunk cost in this situation?

The sunk cost is $ $$