Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $$600,900$ and has $$351,100$ of accumulated depreciation to date, with a new machine that has a purchase price of $$486,200.$ The old machine could be sold for $$64,200.$ The annual variable production costs associated with the old machine are estimated to be $$157,900$ per year for $8$ years. The annual variable production costs for the new machine are estimated to be $$100,400$ per year for $8$ years.

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a$\mathrm{.}1$ 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 DescriptionContinue with

Old Machine

$($Alternative $1)$Replace Old Machine

$($Alternative $2)$Differential Effects

$($Alternative $2)$Revenues:Proceeds from sale of old machine$Proceeds from sale of old machine$Proceeds from sale of old machine$Proceeds from sale of old machineCosts:Purchase pricePurchase pricePurchase pricePurchase priceVariable productions costs $(8$ years$)$Variable productions costs $(8$ years$)$Variable productions costs $(8$ years$)$Variable productions costs $(8$ years$)$Profit $($loss$)$$Profit $($loss$)$$Profit $($loss$)$$Profit $($loss$)$

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For the continue and replace alternatives subtract the costs from the revenues. Multiply the variable production costs 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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a$\mathrm{.}2$ 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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Compare the differential revenues and differential costs of continuing vs$.$ replacing. Which one has the greatest positive differential effect on income?

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

The sunk cost is fill in the blank $1$ of $1$$$.$